JANUARY 02, 2007

By S Jaikumar & G Natarajan, Advocates

PROLOGUE : This piece is either an abridged long article or an elaborate short article. So we had to present it in a trilogy. Please bear with us.  

Goods and Services are two terminal points in trade and commerce. They progress towards each other and get blended at a point where they are thoroughly intermingled and fused together that one may not be able to differentiate between the two. For example, pure services like teaching is one terminal point and pure goods like cars would be the other terminal point. But in cases like house cleaning or plumbing, there will be both of service component as well as goods component (cleaning chemicals) and the service component being more. Similarly in the case of Coco-Cola dispensed through vending machines, the goods component would be more than the service component. They progress to meet at a point like a dress stitched by a tailor, where there would be an equal component of goods (fabric) as well as service (stitching). That's why most of the advanced countries have an integrated Goods and Services Tax (GST) and our India is also rapidly progressing towards the GST!

At present, where there is no GST and having Excise/Customs duties for the commodities and Service tax for the services, the Government has formulated a mechanism to deal them separately. It would be relatively easy to tax the terminal points like the pure goods (cars) under Excise and pure services (teaching) under Service tax. But what about levying tax on the sectors like stitched dress etc, where both the components of goods and services are equally and inseparably present! One possible and plausible way is to give the credit of the tax paid (CENVAT) and offset the impact of double taxation, which is put in place with the integrated Cenvat credit between the Goods and Services, w.e.f 10.09.2004. But that may not be a foolproof and a 100% solution, as in many of the services like construction, erection, catering etc, it may not be practically possible for a service provider to get hold of the duty paid documents of all the inputs used in the provision of such service! For example, the construction industry gets their major inputs like steel, glass and cement, only from the market and not from the manufacturers. That being the case, as on date, the Cenvat scheme may not be a ground reality solution! That's the reason the Government has formulated two other schemes, namely, abatements and Notification No. 12/2003! The abatement scheme is given only for certain services like construction, erection, commissioning and installation, catering, tour operators etc, based on certain law of averages. All the services entitled for the abatement scheme are listed in notification 1/2006-ST dated 1.3.2006 and there are tons of controversies going on about it. But the focus of this article is Notification 12/2003, which is applicable to all services.

If 214/86 and 67/95 are the most discussed notifications under Central Excise law, Notification 12/2003 has the distinction of being so, under the Service tax. As per this Notification 12/2003, the service provider need not include the value of the goods and materials sold to the service recipient. Originally this notification came with a condition that to exclude such value from the taxable value, there shall be a documentary proof specifically indicating the value of such goods and materials sold. Then by Notification No 12/2004, another two conditions were attached, whereby, the service provider is barred from availing the Cenvat credit of the goods and materials sold by him. Nothing more and nothing less!

In a letter No 233/2/2003 CX 4, dated 7-4-2004 addressed to the Punjab Color Lab Association , the Board clarified that the benefit of the Notification No. 12/2003 shall be available to the input materials consumed/sold by the service provider during the provision of such service. Further it stated that the benefit shall be available only if the service provider maintain records in respect of such materials consumed/sold and also indicates the value of such materials in the invoices/bill raised by him.

Whereas the Notification 12/2003 allowed the goods sold during the provision of service to be excluded from the value of the taxable service, this Circular introduced a new concept of allowing the value of the goods consumed during the provision of service also to be excluded from the taxable value. The Hon'ble Tribunal in the case of ADLABS vs CCE, BANGALORE - 2006-TIOL-415-CESTAT-BANG, while interpreting the said Notification and Circular supra, held that the service provider is entitled to the benefit of the Notification 12/2003 and the value of the goods and materials sold and consumed during the provision of such service need not be included in the taxable value. It was also further held that, as there is nowhere stated in the Circular and Notification that the inputs used in the photography should be mentioned in the invoices/bills issued to the customers, the same need not be billed separately. But on the contrary, it could be seen from the Notification 12/2003 supra, there exists a condition that there shall be a documentary proof specifically indicating the value of such goods and materials sold.

This opened the flood gates to the imagination of the industry and the photography service providers started eliminating various components such as, photographic film, photographic paper, consumables, chemistry, electricity etc from the taxable value based on a reasoning that they are consumed in providing the photographic service and started paying service tax ONLY on the remainder, if any!

Then came the decision of the Hon'ble Tribunal in the case of LAXMI COLOR (P) LTD vs CCE, JAIPUR-II - 2006-TIOL-681-CESTAT-DEL, wherein, the ADLABS ratio supra, was dissented and the clarificatory (!) Circular dated 7/4/2004 was struck down as given beyond the scope of the exemption Notification. This made the Revenue woke up from their deep slumber and vide a Circular M.F. (D.R.) F. No. 233/2/2003-CX dated 3/3/2006, the Board withdrew the earlier Circular dated 7/4/2004 supra, and clarified as under:

"The intention of the Notification No. 12/2003-S.T., dated 20.06.2003 is to provide exemption only to the value of goods and material sold subject to documentary evidence of such sale being available. Therefore, in case, the goods are consumed during the provisions of service and are not available for sale, the provisions of the said notification would not be applicable. Therefore, in supercession of clarification to contrary, it is clarified that goods consumed during the provisions of service, that are not available for sale, by the service provider would not be entitled to benefit under Notification No. 12/2003- S.T., dated 20.06.2003."

Further in a recent Circular No. 87/06/2006- ST, Dated: November 6, 2006, given to the automobile sector, to a question as to w hether exemption can be claimed on the cost of consumables that get consumed during the course of providing service, the Board has clarified as under:

"As regards, the issue relating to sale of spare parts and consumables, notification No. 12/2003-ST. dated 20.06.2003, exempts service tax to the extent of value of the goods and materials sold by the service provider to the service recipient, if documentary proof of such sale exists and no credit of excise duty paid on such spares or consumables have been taken. It may, however be pertinent to note that for availing such exemption, the goods must be sold and consequently, they must be available (whether independently or as a part used for repair of a vehicle) for sale. In other words, the exemption would not be available to such consumables which have been consumed during the process of providing service and are not available for sale".

Thus the Board has now firmly clarified that the benefit of the Notification 12/2003 shall not be available to the materials consumed by the service provider in providing the service. For example, in the case of photography services, all the materials, namely, film, paper, consumables, etc are used / consumed in provision of the service and hence there shall be no benefit of 12/2003 for the same. Likewise, in beauty parlours there shall be no 12/2003 benefit for the cosmetics used in beautification. But in the case of automobile service, the benefit shall be available for the shock absorbers, if replaced during the repairs but not for the greases and lubes used in the service.

Now this leaves us with a moot question, in a given transaction, how to decide between the materials sold and consumed and hence how to determine the eligibility of the Notification 12/2003? That too, in respect of works contracts like a tyre retreading activity, will the benefit of 12/2003 be available to the retreaders for the materials (rubber) used for such retreading? As in a works contract, the person is liable to pay sales tax also, will he be still required to pay service tax also, on the same transaction? In other words, can there be a simultaneous levy of both sales tax and service tax in a particular transaction?

Meet you in Part II... tomorrow

(The views expressed are strictly personal)