FEBRUARY 27, 2012

Threshold exemption Notification and POT Rules

By K R Ramankutty, CA

THE fate Notification 12 /2003 dated 20-06-2003

Prior to the amendment to section 67 effective 19.04.2006 explanation to the section excluded the following items interalia from the value of taxable services.

++ The cost of unexposed photography film, unrecorded magnetic tape or such other storage devices , if any ,sold to the client during the course of providing the service ;

++ The cost of parts or accessories or consumables such as lubricants and coolants, if any , sold to the customer during the course of service or repair of motor cars, light motor vehicles or two wheeled motor vehicles ;

++ Cost of parts or other material, if any, sold to the customer during the course of providing maintenance or repair service ;

++ Cost of parts or other material, if any, sold to the customer during the course of providing erection, commissioning or installation service.

Notification 12/2003 dated 20-06-2003 exempted the value of goods and materials sold by the service provider to the service recipient from the value of taxable service .Till 18.04.2006 the deduction had the support of section 67 and wherever there was sale of goods per se there was no scope for any doubt or dispute . Whereas the goods consumed in the provision of service and deemed sale (clause 29AArt.366) was an admissible deduction within the scope of notification was a debatable issue. Tribunal Larger Bench in the case of AggarwalColour Advance Photo Systems Films case 2011-TIOL-1208-CESTAT-DEL-LB held that deemed sale is not covered within the scope of Notification 12/2003 . Therefore for the pre amendment period, sale per se was admissible deduction under notification 12/2003 read with section 67 subject to the other conditions prescribed by the notification are satisfied. In the cases of composite contracts where abatement is not provided for by notification the deduction for value of ‘deemed sale'of goods was becoming a contentious issue and service tax was demanded on the gross value including the ‘deemed sale' material cost. It is pertinent to note that subsequent to the amendment in section 67 effective 19.04.2006, the section did not provide for any deduction for value of goods or materials sold whileproviding the service. Still notification 12/2003 remains in the Statute leaving room to the Dept: to issue Show Cause Notice where the assesseeclaims deduction for sale of material under notification 12 /2003 in the case of composite contracts. If the Government's intention is not to allow deduction for material cost on the ground that the language employed in section 67 is “gross” then the notification 12/2003 has to be rescinded. If the Government's intention is to allow deduction for value of goods including value of ‘deemed sale' of goods from value of taxable service , then section 67 has to be amended toexclude from the gross value , the value of goods or materials sold while providing the service and theNotification 12/2003 also has to be amended to define sales to include “transfer of property in goods involved in the provision of service as goods or as in some other from on which VAT/Sales Tax is charged “ .The words “as in some other from” will take care of ‘deemed sale' also.

Port Service an amendment and the consequences

After the amendment to the definition of port services effective 1-07-2010 in section 65 (82) all services rendered within the port area are to be classified under port services only and provisions of section 65 A shall not apply to any service when the same is rendered wholly within the port .

Notification 25/2007Service Tax dated 25.05.2007 exempts from service tax Civil and Industrial Construction service and Works contracts services provided in relation to construction of port . Similarly Notification 38/2010 dated 28.06.2010 exempts the taxable service of commercial or industrial construction referred to in sub-clause ( zzq ) of clause 105 of section 65 of the Finance Act, when provided wholly within the port or other port, for construction, repair, alteration and    renovation of wharves, quays, docks, stages, jetties, piers and railways, from the whole of service tax leviable thereon under section 66 of the Finance Act.

Notification 11/2011 dated 1.03.2011 exempts services provided in relation to the execution of works contract, referred to in sub-clause (zzzza) of clause (105) ofsection 65 of the Finance Act, when provided wholly within the port or other port, for construction,repair, alteration and renovation of wharves, quays, docks, stages, jetties, piers and railways from thewhole of service tax leviable thereon under section 66 of the Finance Act.

Notification 42/2010 dated 28.06.2010 exempts the taxable service of commercial or industrial construction referred to in sub-clause (zzq) of clause 105 of section 65 of the Finance Act, when provided wholly within the airport, from the whole of service tax leviable thereon under section 66 of the Finance Act.

After 1.07.2010 the Construction service or the Works contract service when provided wholly within the port are to be classified only under port service how the exemption Notification will apply to the ‘port services'?.

Dept is seized of the issue and clarification (TRU 334/03/2010) was issued which concludes as follows.

"All other services carried out within a port or other port or an airport would be subjected to service tax under the category of port/other port/airport services"

Does it mean that all the services mentioned in the circular,(Construction related, Cargo handling etc) are to be classified under the respective category notwithstanding the amendment introduced in section 65(82). A view is taken that the exemptions referred above are no more applicable as all the abovenotifications have become redundant because of the amendment introduced in the section. Now in view of the recent Supreme Court decision in CCE, Bhopal Vs Minwool Rock Fibres Ltd 2012-TIOL-18-SC-CX even the Quasi Judicial authorities are not required to follow the Board Circular,how the assesses can come out of demand unless the notifications itself are amended in line with the amendment introduced in the port services effective 1.07.2010

Threshold exemption Notification and the POT Rules

Explanation (B) to para 3 of notification 6/2005 as amended explains “aggregate value not exceeding 10 lakhs on the basis of the first consecutive payments received. Receipt basis is no more relevant in view of the POT Rules introduced from 1.04.2011. The limit also to be suitably enhanced as the limit was fixed last in 2008-2009

(The author is a Kochi-based CA practising in the area of Indirect Taxes )