Amendments in Service Tax Rules and Clarifications

The article explains the recent amendments in the Service Tax Rules, Departmental clarification in respect of renting of immovable property service, works contract service and commissioning and installation service. The article also provides valuable insights on the recent Supreme Court Rulings on the binding nature of the CBEC Circulars.

1. Amendments in Service

Tax Rules (as per Notification No. 45/2007 dated 28-12-2007)

1. In rule 5,for sub-rule (2), the following sub-rule is substituted, namely:–

"Every assessee shall furnish to the Superintendent of Central Excise at the time of filing of return for the first time or the 31st day of January, 2008, whichever is later, a list in duplicate, of-

1. all the records prepared or maintained by the assessee for accounting of transactions in regard to, –

1. providing of any service, whether taxable or exempted;

2. receipt or procurement of input services and payment for such input services;

3. receipt, purchase, manufacture, storage, sale, or delivery, as the case may be, in regard of inputs and capital goods;

4. other activities, such as manufacture and sale of goods, if any.

2. all other financial records maintained by him in the normal course of business.”.

2. Sub-rule (4) relating to the inspection and examination of records by the Central Excise Officer is omitted.
    

3. A new Rule 5A in relation to access to a registered premises by an officer is inserted, namely:-

"Rule 5A. Access to a registered premises. (1) An officer authorised by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

(2) Every assessee shall, on demand, make available to the officer authorised under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be, –

1. the records as mentioned in sub-rule (2) of rule 5;

2. trial balance or its equivalent; and

3. the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961 (43 of 1961), for the scrutiny of the officer or audit party, as the case may be.’’.

2. Clarification in respect of renting of immovable property service and works contract service as per Circular No. 98/1/2008-ST dated 4-1-2007

Issue	Clarification
Commercial or industrial construction service	Right to use immovable property is leviable to
[section 65(105)(zzq)] or works contract	service tax under renting of immovable property
service [section 65(105)(zzzza)] is used for	service.
construction of an immovable property.
Renting of an immovable property is leviable	Commercial or industrial construction
to service tax [section 65(105)(zzzz)].	service or works contract service is an input
Whether or not, commercial or industrial	service for the output namely immovable
construction service or works contract service	property. Immovable property is neither
used for construction of an immovable	subjected to central excise duty nor to service
property, could be treated as input service for	tax.
the output service namely renting of	Input credit of service tax can be taken only if
immovable property service under the	the output is a ‘service’ liable to service tax or a
CENVAT Credit Rules, 2004?	‘goods’ liable to excise duty. Since immovable
	property is neither ‘service’ nor ‘goods’ as
	referred to above, input credit cannot be taken.
Services provided in relation to execution of a	Value for the purposes of levy of service tax
works contract is leviable to service tax	under works contract service does not include the
[section 65(105)(zzzza)].	value pertaining to transfer of property in goods
VAT / sales tax is payable on the transfer of	involved in the execution of a works contract
property in goods involved in the execution of	leviable to VAT/sales tax. Works contract service
a works contract. Service tax is leviable on	provider is, therefore, not eligible to take credit of
the value equivalent to the gross amount	excise duty paid on such goods involved in the
charged for the works contract less value of	execution of works contract.
the transfer of property in goods involved in
the execution of the works contract which is
leviable to VAT / sales tax [Rule 2A of the
Service Tax (Determination of Value)
Rules, 2006].
Whether or not, excise duty paid on goods,
subjected to levy of VAT / sales tax under
works contract service, can be taken as credit
under the CENVAT Credit Rules, 2004?
Services provided in relation to execution of	Prior to 1-6-2007, service provider classified the
works contract is leviable to service tax w.e.f.	taxable service under erection, commissioning or
1-6-2007 [section 65(105)(zzzza)].	installation service [section 65(105)(zzd)],
Works Contract (Composition Scheme for	commercial or industrial construction service
Payment of Service Tax) Rules, 2007 provides	[section 65(105)(zzq)] or construction of complex
option to pay service tax @ 2% of the gross	service [section 65(105)(zzzh)], as the case may
amount charged for the works contract.	be, and paid service tax accordingly. The contract
However, the service provider opting for	for the service was a single composite contract.
composition scheme for payment of service	Part of service tax liability corresponding to
tax should exercise the option prior to	payment received was discharged and the balance
payment of service tax.	amount of service tax is required to be paid on or
The issue pertains to, –	after 1-6-2007 depending upon receipt of
(i) contracts entered into prior to 1-6-2007	payment.
for providing erection, commissioning or	Classification of a taxable service is determined
installation and commercial or residential	based on the nature of service provided whereas
construction service, and	liability to pay service tax is related to receipt of
(ii) service tax has already been paid for part	consideration. Vivisecting a single composite
of the payment received under the respective	service and classifying the same under two
taxable service. Whether in such cases, the	different taxable services depending upon the time
service provider can revise the classification to	of receipt of the consideration is not legally
works contract service from the respective	sustainable.
classification and pay service tax for the	In view of the above, a service provider who paid
amount received on or after 1-6-2007 under	service tax prior to 1-6-2007 for the taxable
the Composition Scheme?	service, namely, erection, commissioning or
	installation service, commercial or industrial
	construction service or construction of complex
	service, as the case may be, is not entitled to
	change the classification of the single composite
	service for the purpose of payment of service tax
	on or after 1-6-2007 and hence, is not entitled to
	avail the Composition Scheme.

3. Clarification in respect of renting of as per F.No.137/73/07-CX.4 issued by the Ministry of Finance dated 12-11-2007

Vide the above; the Ministry of Finance has clarified the following:

“For availing abatement from the gross amount charged, one of the conditions stipulated is that the gross amount charged should include the value of plant, machinery equipment, structure or parts and any other material sold by the commissioning and installation agency. The other condition is that the service provider should not take the credit on input, input service and capital goods. The objective of allowing abatement for calculation of service tax is to offset the value of goods supplied in case of a composite supply of goods and services and availment of abatement is optional. Therefore, abatement would not be admissible in such cases where erection and commissioning service is provided under a contract/agreement that does not include the value of goods; i.e., transmission tower and other accessories, which are erected or commissioned under such contract/agreement. In other words, service tax would be applicable on the entire amount charged for erection and commissioning service if such amount does not include the value of all goods supplied”.

4. Supreme Court Rulings on the binding nature of CBEC Circulars

The Supreme Court has recently decided in case of Union of India vs. Arviva Industries (I) Ltd. 2007 (209) ELT 5 (SC), CCE vs. Mysore Electricals Industries Ltd. 2006 (204) ELT 517 (SC), and Suchitra Components Ltd. vs. CCE 2007 (208) ELT 321 (SC) the question relating to the binding nature of the Circulars issued by CBEC section 37B of the Central Excise Act.

The Hon'ble Supreme Court made the following observations:–

1. The circulars are binding on the department and thus the department cannot take a stand contrary to the circular even in an appeal, and
    

2. Benevolent circulars will have retrospective effect whereas oppressive circulars will have prospective effect, and assessee has the right to claim that oppressive circulars are enforceable only prospectively.

The Supreme Court further observed the following principles earlier enunciated by the Court in the case of Commissioner of Customs vs. Indian Oil Corporation (2204) 3 SSC 488:–

1. Although a circular is not binding on a court or an assessee, it is not open to the revenue to raise a contention that is contrary to a binding circular by the board. When a circular remains in operation, the revenue is bound by it and cannot be allowed to plead that it is not valid nor that it is contrary to the terms of the statute.
    

2. Despite the decision of this court, the department cannot be permitted to take a stand contrary to the instructions issued by the board.
    

3. A show-cause notice and demand contrary to the existing circulars of the board are ab initio bad.
    

4. It is not open to the revenue to advance an argument or file an appeal contrary to the circulars

It is important to note here that the above decisions will also be applicable to service tax. As per section 83 of the Finance Act, the provisions of section 37B of the Central Excise Act is applicable to service tax. Thus, it can be concluded that service tax circulars issued by the CBEC will have prospective effect if they are not beneficial to the assessee and will have retrospective effect if they are beneficial to the assessee. Where the circular is not beneficial to the assessee, the assessee has the right to claim that the oppressive circular is enforceable only prospectively.