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Fiscal 2003-04 has indeed been
significant for the levy service tax. Not only that the rate was increased
from 5% to 8% for the first time since its introduction in 1994, the
widened tax base of about fifty nine services included some of the
services provided by industry or manufacturers as incidental activity
to the primary activity of manufacture. For example, "commissioning
and installation services" and "maintenance and repairs services.
These services are ‘work’ oriented or in the nature of "execution
of work". They assume specific importance and in many cases, provision
of other indirect tax laws also apply to contracts involving such
‘work’ and/or services.
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Some of the services introduced
in the service tax net w.e.f. July 1, 2003 are analysed and examined
below. [ All the sections quoted below are of Chapter-V of the Finance
Act,1994 as amended up to date ].
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Commissioning or Installation Services
:
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"Commissioning or Installation"
means any service provided by a commissioning and installation
agency in relation to commissioning or installation of plant,
machinery or equipment; [Section 65(28)]
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"Commissioning and
Installation Agency" means any agency providing service in
relation to commissioning or installation; [ Section 65(29)
]
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"Taxable service" means
any service provided, to a customer, by a commissioning and
installation agency in relation to commissioning or installation;
– [Section 65(105)(zzd)]
EXCLUSION IN VALUE : (vide
clause (vii) of Explanation to section 67)
Cost of parts or other
material if any sold to the customer during the course of providing
commissioning or installation service.
Perusal of the provisions
of the law indicates that "commissioning and installation" in
respect of ‘plant’, ‘machinery" or ‘equipment’ only are covered.
In case of composite or turnkey contracts, parts/cost of material/goods
supplied does not form part of the value of taxable service. However
this is subject to production of documentary evidence. Here, the
term ‘cost’ is interpreted to construe as cost at which it is
supplied to the client. "Turnkey contracts are covered by the
provisions of ‘works contract’ and most often are of non-divisible
nature. Initially, the Finance Ministry’s Circular No. 59/2003
of June 20, 2003 stated, "in case the service provider shows consolidated
charges, service tax would be leviable on such consolidated amount".
This meant that, if the service provider was unable to provide
break-up of "commissioning and installation charges", he could
be taxed on full amount of the contract, which included cost of
the material and goods supplied. However, this gave rise to questioning
‘legality’ of such stand and after facing resistance and representation
from the concerned contractors and industry as whole, an option
was provided by the CBEC vide Notification No. 19/2003 ST of August
21, 2003, that service tax will be paid on 33% of the gross amount
charged for contract of commissioning and installation services
including the cost of plant, machinery or equipment supplied.
This option can be exercised only when a commissioning or installation
agency decides not to eliminate cost of material and/or equipment
supplied in terms of Notification No. 12/2003 service tax. (Notification
No. 12/2003 applies to all services and it allows exemption from
service tax respect of any goods or material sold by the service
provider to the recipient of service subject to documentary evidence.)
CBEC in its circular No.62/11/2003 of 21-8-2003 also clarifies
that commissioning or installation services provided by an individual
are exempt and issued Notification No.18/2003 of the same date
viz. 21-8-2003 which provides that commissioning and installation
services provided by a service provider "other than a commercial
concern" are exempt. The said Circular distinguished "erection
charges" from installation and commissioning. According to CBEC,
"erection" means putting up civil structures such as water tanks,
piping, electrical wiring etc." Installation of a plant/machinery/equipment
means the act of putting an equipment/machinery/plant into its
place and making it ready for use. Installation commences after
erection has been completed. Commissioning would mean operationalising
an installed plant/machinery/equipment.
It is pertinent to note
here that CBEC had issued a circular on 18-12-2002 - Circular
No. 49/11/2002) sometime prior to introduction of service tax
on this service seeking to tax ‘erection’ and ‘commissioning charges’
treating it as "technical assistance" under the category of "consulting
engineers". It now remains to be seen whether the government comes
out with any clarification in respect of contracts entered into
prior to 1st July, 2003. It is also a question as to what view
the department takes of the show-cause notices issued prior to
1st July, 2003 for such services, especially when, the services
of above nature are now covered by a specific entry. Although
a six month period has passed, no indication or intention is expressed
by the government as regards either the earlier Circular or the
pending cases and SCNS.
Moreover, the Honourable
Tribunal in case of M/s Daelim Industrial Company vs. CCE-2003-(155)-ELT-457
held that "a work contract on turnkey basis ……… not a consultancy
contract. It is well settled that a work contract cannot be vivisected
and part of it subjected to tax". In this case, the department
had sought to levy service tax on part of the "engineering services"
provided in the ‘works contract". Since the department is expected
to have appealed against this order, ‘outcome’ of such cases will
be governed by decision of the higher authority in this case.
Until then, lot of uncertainty will prevail over pending matters
at various stages in the department.
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Maintenance or Repairs service
Perusal of the provisions
of the law indicates that maintenance or repair services provided
in respect of goods or equipment which does not specifically include
motor vehicles and which are either under a contract or agreement
or which are provided by a manufacturer or by his authorised person
are covered by the scope of this service. Along the lines of commissioning
and installation service, in this case also, cost of goods or
materials sold by the service provider to the recipient of service
will not attract the levy subject to documentary evidence in this
regard. (Notification No.12/2003-ST of 20-6-2003). The question
arises as to ongoing contracts as on the effective date of July
1,2003 which were entered into prior to the date of the levy.
In some cases, the whole amount for the annual maintenance contract
(AMC) is received prior to July 1, 2003 – CBEC vide Notification
No.11/2003-ST dated 20-6-2003 provided that contracts entered
into prior to 1-7-2003 and moneys also received prior to this
date are exempt from service tax. The issue then arises is whether
or not service tax is attracted where services are provided on
or before 1-7-2003 but the bills are raised or payments are made
after 1-7-2003. No tax can be levied except under the authority
of law. Accordingly, any service provided prior to the effective
date of the levy will not attract service tax irrespective of
when the bills are raised or payment made.
The CBEC vide Notification
No.20/2003-ST dated 21-8-2003 explicitly exempted services in
relation to maintenance or repairs of computer, computer system
and computer peripherals.
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Commercial Training or Coaching
Centre
"Commercial Training or Coaching" means any training or coaching
provided by a commercial training or coaching centre; - [Section
65(26)]
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"Commercial Training or Coaching
Centre" means any institute or establishment providing commercial
training or coaching for imparting skill or knowledge or lessons
on any subject or field other than the sports, with or without
issuance of a certificate and includes coaching or tutorial
classes but does not include preschool coaching and training
centre or any institute or establishment which issues any
certificate or diploma or degree or any educational qualification
recognised by law for the time being in force; -[Section 65(27)]
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"Taxable service" means any
service provided, to any person, by a commercial training
or coaching centre in relation to commercial training or coaching;
- [Section 65(105)(zzc)]
Perusal of the provisions
of the law indicates that commercial training/coaching provided
by any institute or establishment are taxable. Private coaching
provided at the end of recipient is not included. Coaching on
every subject, skill, knowledge is included in this definition
except sports. In addition to this, pre-school coaching and institution
awarding degree/diploma/educational qualification are not covered
by the law. Accordingly, Universities or affiliated colleges awarding
a recognized degree are excluded from the definition. On the top
of providing specific exclusions, the CBEC declared a few exemptions
also. Vocational training institutes that impart training like
typing, tailoring, TV repairs etc. foreign language institutes,
computer training institutes, hobby classes like art, dance, painting,
martial arts, singing etc. are all exempted up to 29-2-2004 in
terms of Notification No. 09/2003 of June 20, 2003. The Board
issued one more Notification; i.e., Notification No. 10/2003 of
June 20, 2003 to exempt a training which forms essential part
of a course of an institute leading to issuance of any certificate/degree/educational
qualification and when charges for such services are paid directly
to such institutes and not to coaching centres. The Institute
of Chartered Accountants of India is one such illustration. The
CBEC in its clarificatory remarks in Circular No. 59/8/2003 of
20-6-2003 has provided that postal coaching/training provided
by an institution also attracts service tax and the cost of study
material provided by coaching centre also is not excludible from
the value of ‘taxable service’ unless the same is in the form
of standard text books.
The issue in this case arises
as to the system of receiving advance/upfront fees and the applicability
of levy in case when the whole amount was received prior to 1-7-2003.
The CBEC sensing a lot of concern over the interpretation of Rule
6(1) of the Service Tax Rules, 1994 in this regard issued a specific
clarification vide Circular No. 65/14/2003 dated November 5, 2003.
In terms of the said Rule 6(1), service tax is payable when amount
towards value of taxable service is received. Therefore it had
been interpreted by many that no service tax would have to be
paid on advances received prior to July 1, 2003. However, in terms
of this circular, no exemption on the lines of Notification No.
11/2003 is granted to any service other than maintenance and repair
services in case of advance payments. The circular further clarifies
that when advance is received prior to the date of the levy becoming
effective for a service rendered after the effective date of the
levy, service tax has to be paid on the value of service attributable
to the relevant quarter/month on prorata basis.
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Franchise service
It can be observed from
the above that no specific qualification has been prescribed for
a franchiser or a franchisee. The definition of franchiser includes
an associate of franchiser or a person designated by the franchiser
to enter into agreement. Necessarily, all the four conditions
laid down must be satisfied in order that service tax is attracted
on the arrangement of franchise. Grant of representational right
to sell/manufacture goods or provide services or undertake process,
also provide concept of business operation and know how, training
etc., charge a fee and restrict franchisee from engaging into
similar process/goods/services. It is essential to examine the
agreement entered into between franchisor and franchisee to determine
whether the agreement is covered by this category of service.
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Conclusion
It can be observed from brief analysis of the above services that
by and large, industrial and manufacturing sector either consumes
these services or provide some of these services. Thus, the Finance
Act, 2003 has made significant impact of service tax on the industry
as a whole both in term of coverage and revenue.
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