TIOL-DDT 1224
27.10.2009
Tuesday

IN DDT 1204 25.09.2009 we reported that Board has issued Circular 116 dated 15.09.2009 clarifying leviability of service tax on construction of canals by Government agencies.

Further in DDT 1212 09.10.2009 we reported that Board mysteriously brought in an amended version of this circular and tried to pass it off as the original one. We also highlighted certain technical aspects of this circular and how and why it failed to address the issues it sought to clarify in the first place.

While the mystery surrounding the replacement of the original circular by another circular still remains a mystery, the Board has issued a new notification exempting taxable services referred to in sub-clause ( zzzza ) of clause (105) of Section 65 of the Finance Act, in relation to execution of a works contract in respect of canals, other than those primarily used for the purposes of commerce or industry , from levy of service tax. The explanation under Section 65(105)( zzza ) defines works contract inter alia as “turnkey projects including engineering, procurement and construction or commissioning (EPC) projects” which appears to be the reason for disputes. In many places, it is viewed that works contract under EPC mode is taxable even for non commercial / industrial activities. Though Board bravely clarified in para 3 of the first version of the Circular dated 15.09.2009 that canals of irrigation projects are not covered under ( zzzza ), soon must have realised that this clarification is not supported by the definition / explanation under Section 65(105)( zzzza ) and issued a revised clarification which really did not solve the problem. So, now they have issued an exemption Notification to exempt services provided under works contract, other than those primarily used for commerce or industry.

What happens to Circular No. 116 dated 15.09.2009 (both legitimate and illegitimate ones)?

Hitherto Circular 116 dated 15.09.2009 (both the original and amended version) sought to clarify the issue of leviability of service tax on construction of canals by government agencies. Paragraph 2 of the said circular (amended version as well as original version) reads as follows:

“2. Thus the essence of the definition is that the “commercial or industrial construction service” is chargeable to service tax if it is used, occupied or engaged either wholly or primarily for the furtherance of commerce or industry. As the canal system built by the Government or under Government projects, is not falling under commercial activity, the canal system built by the Government will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax.”

On this aspect, in DDT 1212 09.10.2009 we said “……… It is common knowledge that all irrigation projects of Government are though undertaken by the Irrigation/Agriculture Department of the respective Governments (State or Centre), they are actually executed by private agencies only under the actual supervision of the said department. In effect, all activities related to construction of irrigation projects and canal systems are undertaken by private agencies only…...”

This actually explains the futility of clarification issued at paragraph 2 of the said circular. Further, we also questioned the wisdom of the Board in mentioning construction of canals as a ‘revenue generating measure' by private agencies and requested the Board to explain what they actually meant by this phrase ‘revenue generating measure'. Does it mean the profits earned by the private agencies undertaking the construction of canals or does it mean revenue earned from supply of water through such canals which is akin to infrastructure projects like national highways and corridors built on BOOT basis by private agencies?

The circular further explained that government taking up construction activity of dams, buildings or infrastructure construction etc through EPC (Engineering Procurement & Construction) mode is exempt from levy of service tax for works contracts undertaken for such construction activity since sub-clause ( zzzza ) of Section 65(105) of the said Act itself excluded such activities from the purview of definition of taxable service.

This aspect is now sought to be covered by the new notification which exempts construction of canals undertaken by works contracts from levy of service tax.

Fortunately, there is no specification in the new notification that the activities would be exempt from levy of service tax only if it is undertaken by the government or government agencies, because the wise babus who drafted this notification understood by now that it is the private agencies who actually undertake such work for the relevant government departments. But they are still stuck with usage of phrases like “used for purposes of commerce or industry” without explaining or illustrating as to what this could be.

Last but not the least, is this notification clarificatory in nature and thereby applicable retrospectively because it seeks to address a long pending issue or is it only to be read prospectively? Now that there is an exemption from 23 rd October, the auditors will have field day and keep the consultants busy by raising demands for the period prior to 23 rd October 2009 because there was no exemption.

NOTIFICATION NO 41/2009-Service Tax, Dated: October 23, 2009

Exim Bank's Line of Credit of USD 20 million to the State of Eritrea

Exim Bank of India has concluded an agreement dated August 24, 2009 with the State of Eritrea making available to the latter, a Line of Credit (LOC) of USD 20 million for financing eligible goods and services, machinery and equipment including consultancy services from India for the purpose of financing multipurpose agricultural projects not exceeding USD 10 million [the proposed projects include artificial insemination development project, poultry waterer and feeder, establishment of milk collection centers , pressurized irrigation system (drip irrigation system), solar pumps project and soil survey and land evaluation equipment] and multipurpose educational projects not exceeding USD 10 million [which include purchase of teaching materials including books, laboratory/educational equipment, chemicals, computers etc].

The Credit Agreement under the LOC is effective from October 1, 2009 and date of execution of Agreement is August 24, 2009. Under the LOC, the last date for opening of Letters of Credit and Disbursement will be 48 months from the scheduled completion date(s) of contract(s) in case of project exports and 72 months (August 23, 2015) from the execution date of the Credit Agreement in case of supply contracts. Shipments under the LOC will have to be declared on GR / SDF Forms as per instructions issued by Reserve Bank from time to time.

No agency commission is payable under the above LOC. However, if required, the exporter may use his own resources or utilize balances of his Exchange Earners' Foreign Currency Account for payment of commission in free foreign exchange. Authorised Dealer Category- l (AD Category-l) banks may allow such remittance after realization of full payment of contract value subject to compliance with the prevailing instructions for payment of agency commission.

A.P. (DIR Series) CIRCULAR NO 12/RBI., Dated: October 23, 2009

CBI arrests IT Commissioner

The CBI has arrested a Commissioner of Income Tax of Nagpur and his wife in a case of assets disproportionate to known sources of Income.

Jurisprudentiol– Wednesday's Cases

INCOME TAX

Income tax – Sec 80IA – Assessee's unit is located in hill state of Himachal Pradesh – receives freight subsidy for lack of rail network in state – claims deduction – Since subsidy income is not operational profit derived from undertaking, it is not eligible for deduction – High Court

With such an expression comprehensively explained in many of the judicial pronouncements, including the ones from the Apex Court, the High Court has held that since the transport subsidy received by the assessee is not a profit derived from business and it is not an operational profit and also the fact that the source of the subsidy is not the business of the assessee but scheme of the Central Government, it is not an eligible profit for deduction u/s 80IA.

CUSTOMS

In view of the fact that appeals relating to year 2002-2003 are coming up for final hearing now, CHA's application for early hearing allowed –CESTAT

Naturally, in the absence of completion of any proceedings of suspension, the request for early hearing could not have been made. Therefore, we find that this decision also cannot be applied to the present facts. Without going into the merits as to whether the revocation is justifiable or not, in view of the large pendency of appeals before this Tribunal and in view of the fact that business of the CHA has remained closed for nearly two years and will remain closed for years, we allow the early hearing application.

CENTRAL EXCISE

Appellant procuring inputs against contractual agreements for agreed prices – later reducing the price with retrospective effect and issuing debit notes – No cause for reducing the CENVAT Credit availed by treating reduced portion of value as deposit – CESTAT

In these circumstances, the appellants have rightly claimed the CENVAT Credit on the actual duty paid. There is no provision in the CENVAT Credit Rules that the appellants are not entitled to take the CENVAT credit of such duty paid. We have gone through the reliance placed by the learned Advocate and ratio of those reliance are that the duty has to be determined by the jurisdictional officer of the supplier unit and it is not done, it cannot be disputed by the officer of the recipient unit.

See our columns Tomorrow for the judgements

Until Tomorrow with more DDT

Have a nice day.

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