FEBRUARY 10, 2010

Works Contract Service should be expanded to cover all activities presently taxed under VAT

By D B Bhasakra Sharma, Superintendent of Central Excise

THE Works contract tax as per the present definition given in the Finance Act , 1994 covers only composite contract ( where supply of material and labour is involved ) relating to Industrial or commercial construction services, Residential Complex services, and EPC contract. But the very idea of bringing in works contract service is to levy service tax on the labour component of such services which are composite in nature and taxable under VAT. Hence it is suggested to expand the definition of works contract service to include all activities wherever there is transfer of property in goods involved in the execution of any contract and taxable under VAT. For example some of the interior works - like supplying & installation of office partitions, work stations false roofing etc- done by certain service providers for commercial/office establishments do not get covered either under Commercial construction nor under the present definition of Work Contract Service , though they are taxable under VAT.

What is the meaning of 'Part thereof':

The definition of ‘Industrial or Commercial Construction Service”, Residential Complex Service and Works Contract Service contain the word “Part thereof”. It is not understood what these words seek to imply in the context of the definition of these services. For example Residential complex service covers in its ambit any service provided for construction of complex containing more than 12 Units. In this context whether any service provided to a single unit in the complex constitute a ‘part there of' or not. Similar doubt arise in respect of definition of works contract service also as the following clauses of definition contain the words ‘ part thereof'

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof ; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

How to interpret the words ‘part thereof' in the above context?.

Hence, it is suggested that the meaning of the phrase ‘part there of ‘needs to be explained instead of leaving it to the wild interpretation at field level.

Act should provide a machinery provision to reclassify service at the time of Adjudication:

With more than 100 services under Tax net and some services having overlapping nature there is every possibility of issuing notices by the department under a particular service depending on the available information furnished by the assesses. But during the course of adjudication proceedings it may occur to the adjudicating authority that the services might get classifiable under a service other than what the SCN has been issued. In such cases the only option before the adjudicating authority is either to confirm the demand under the service for which notice is issued or drop further proceedings. In either case it is a loss to the revenue (because even in cases where demand is confirmed it is lost in the appellate stage). If the adjudicating authority depending on the submissions made by the party may sometimes confirm the demand under a service other than for which notice has been issued. Even in such cases also the department loses the case because the Appellate forum will treat it as traversing beyond the scope of notice. Hence, it is felt there is a need to have a machinery provision in the Finance Act to deal with such situations and to protect the Government from losing revenue on technical grounds like wrong classifying of services at the time of issuance of notice. This provision can be included with built in checks and balances.

There should be provision in the Act to issue notices even in cases not involving suppression of facts beyond one year:

With Apex court ruling that mandatory penalty required to be imposed under Section 11AC or under Section 78 where suppression of facts are proved and adjudication authorities have no discretionary power in this regard. The cases challenging imposition of this penalty are increasing day by day in the appellate forums because though the assesses are willing to pay the duty or tax they are not prepared to pay the penalty because most of the demands in recent times relate to interpretation of statute or some exemption notification where bonafide mistake is always possible. Suppose if the adjudicating authority do not impose penalty under these section by reasoning in the orders that there is no suppression of facts but confirm the demand , then there is a danger of department losing the whole demand on limitation grounds at the Appellate stage (recent example is that Department lost a case -Indian Institute of Chemical Technology vs CCE , Hyd where the adjudicating authority has not imposed penalty under Section 78 by giving findings that there is no suppression of facts with intent to evade payment of tax In this case party has paid the tax before issuance of notice , but contested and won the case on limitation grounds)

Hence, it is felt that the Act should have a provision to cover extended period of limitation in cases where the non-payment or short payment of tax/duty occurred due to bonafide mistake or interpretation of law without requirement of imposition of equivalent penalty. This will increase leverage for the department to reduce litigation by convincing the assessees to pay duty /tax even after issuance of notice.

CENVAT Rules:

Though CENVAT credit rules are merged and there is only one Rules for both service providers and manufacturers , the field officers are still interpreting them as separate by taking a stand that a manufacturer cum service provider cannot utilize the credit of input services used in relation to the manufacturing activity for the payment of out put services service he provides. For example a tower manufacturer may procure certain input services for the manufacture or marketing of towers (say Banking services/insurance services) the credit of which he may utilize for payment of service tax on commissioning or installation of towers. Logically he is correct, but the following definition given in CCR may be interpreted to mean that both manufacturing activity and provision of service are mutually exclusive activities so far as Cenvat Credit Rules are concerned.

(l) "input service" means any service,-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the 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,

This lacuna (?) may required to be corrected by amending the rules suitably

Cenvat & Dealer:

Definition of the First Stage dealer in the Cenvat Credit Rules needs to be amended by allowing the facility only in cases where the dealer purchases goods directly from the manufacturers of such goods in which the dealer is dealing in. As per the present provision the dealer can issue cenvatable invoices even against the goods sourced under ‘input cleared as such' from any manufacturer (even though he does not manufacture the said goods but clears them under clause ‘ input cleared as such' ) . This amendment may check fraudulent availment cenvat credit to a large extent.

Amendment to ER-1 :

ER-1 return needs to be amended to specifically contain a declaration with regard to default payment made during the month with an undertaking from the assesses that he will follow the procedure prescribed under Rule 8(3A) of Central Excise Rules in the event of failure to pay the default payment with in 30 days. If this declaration is there the department can take precipitate action without taking recourse to the issue of notice in such cases.

(The views expressed are strictly personal)