‘If you cannot convince them, confuse them’. The CBEC seems to be working with this very motto when it comes to works contract service. More than half a dozen big and small clarifications and amendments have been issued since the introduction of this new taxable service in June 2007.

The most recent amendment was less than a week ago. Works contract is nothing but composite contract involving both the supply of materials and rendering of services. In a works contract, there is a transfer of materials from the contractor to the contractee. In order to specifically provide for a mechanism to tax the service component of a works contract, a new category of service was introduced with effect from 01.06.2007.

In 2008, the ministry vide its circular clarified that prior to 1-6-07, service provider classified the taxable service under erection, commissioning or installation service [section 65(105) (zzd)], commercial or industrial construction service [section 65(105)(zzq)] or construction of complex service [section 65(105)(zzzh)], as the case may be, and paid service tax accordingly. In case of ongoing contracts for the service, a part of service tax liability corresponding to payment received was discharged and the balance amount of service tax is required to be paid on or after 1-6-07, depending upon receipt of payment. It is evident that classification of a taxable service is determined based on the nature of service provided whereas liability to pay service tax is related to receipt of consideration.

Thus a service provider who paid service tax prior to 1-6-07 for the taxable 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 1-6-07 and hence, is not entitled to avail the composition scheme.

On 7.6.2010 this circular was challenged in AP high court in the matter of M/s Nagarjuna Construction Company Limited vs. Government of India STO 2010 AP 299, wherein it was held that on a true and fair construction of Rule 3(3) of the Composite Scheme Rules, it is clear that where in respect of a works contract service tax has been paid, no option to pay service tax under the composition scheme could be exercised.

The court further held that there is no ambiguity in this provision. The entitlement to avail the benefits of the composition scheme is only after an option is exercised under Rule 3(3) of the 2007 Rules and this provision specifically enjoins a disqualification for exercise of such option where service tax had been paid in respect of a works contract.

To put it succinctly, where service tax has been paid in respect of a works contract, the eligibility to exercise an option to avail the benefits of the composition scheme under the 2007 Rules is excluded. The matter was once again examined by the CBEC. Recently, the ministry vide Circular 128/10/2010-S.T. dated 24.08.2010 on works contract on as to whether benefit of composition scheme is available prior to 01.06.2007 for ongoing work contract projects or otherwise.

As regards applicability of composition scheme, the material fact would be whether such a contract satisfies rule 3 (3) of the works contract (composition scheme for payment of service tax) Rules, 2007. This provision casts an obligation for exercising an option to choose the scheme prior to payment of service tax in respect of a particular works contract. Once such an option is made, it is applicable for the entire contract and cannot be altered. Therefore, in case a contract where the provision of service commenced prior to 01.06.2007 and any payment of Service Tax was made under the respective taxable service before 01.06.2007, the said condition under rule 3(3) was not satisfied and thus no portion of that contract would be eligible for composition scheme.

On the other hand, even if the provision of service commenced before 01.06.2007, but no payment of service tax was made till the taxpayer opted for the composition scheme after its coming into effect from 01.06.2007, such contracts would be eligible for opting of the composition scheme. This ongoing process of issuing clarification has created a fresh doubt and confusion, as to whether, the returns filed prior to issue of the recent circular will be subjected to reassessment and re-scrutinised as divergent practices have been prevailing throughout the country, compelling ministry to intervene time and again.

The Target Plus Scheme (TPS) was introduced in the Foreign Trade Policy 2004-2009. The details of the scheme are enumerated under Para 3.7 of the Foreign Trade Policy and Para 3.2 of the Hand Book of Procedure and also in the Notification No. 32/2005-Cus dated 08.04.2005. This scheme provided for duty credits of 5%, 10% or 15% of FOB Value of the quantum by which the exports grew over the last year for exporters who achieved a quantum growth in exports of over 20% or 25% or 100% over last year export figure. The scheme permitted the Licence holder to utilise the full value of duty credit for importing any materials to make any resultant product himself or through his job workers. In case of manufacture on job-work basis the name, address and production capacity of the job-worker needs to be endorsed on the TPS Certificate. The Additional Customs duty and special CVD debited in the license is also permitted as Cenvat credit to the license holder or can be claimed as drawback. The scheme further provided for sale of the resultant product after manufacture in local market or to the job worker on payment of appropriate Central Excise duty, but prohibited the sale of the imported raw material before manufacture of finished goods.

By a public notice dated 7th April 2005, the Directorate General of Foreign Trade prescribed a form in Appendix 17D in which an application would have to be made for availing of Duty Free Export Credit (“DFEC”) under the TPS for the two licencing years 2004 to 2006. At Serial No. 10 of Appendix 17D, it was stated that goods i.e. inputs and capital goods should have a “broad nexus” with the “Export Product Group”. Thereafter, by a Public Notice No. 16 dated 4th June 2005, the earlier Appendix 17D was replaced by a new one. Para 10 of Appendix 17D as amended contained a provision in relation to the “broad nexus” and read as under:

“Goods allowed to be imported under this scheme shall have a broad nexus with the products exported. For the purpose of import entitlements under this scheme, “broad nexus would mean goods imported with reference to any product groups of the exported goods within the overall value of the entitlement certificate.”

A further circular dated 8th May 2007 was issued by the Department of Revenue, Government of India, which at para 4 stated as under :-

“In the light of this, the Ministry of Law clarified that the holder of TPS certificate is permitted to import an item under the TPS and get the same processed into possible resultant products only if the same has a „broad nexus with the product group as an input in the export product and is required to be used as an input in the product exported for which TPS benefit is sought. The Ministry of Law has also clarified that the term „broad nexus with the product group is in addition to and not in substitution of the words “inputs” and “own use” in Para 3.7.6 of the Scheme.“

This circular was followed by a Public Notice dated 21st June 2007 which sought to further narrowed down the right to import under TPS to only such inputs which have a nexus with the export product, and not the export product group. After the amendment, para 3.2.5 (II) of HBP reads as under:

“II. Goods allowed to be imported under this scheme shall have a broad nexus with the products exported. For the purpose of import entitlements under this scheme, “broad nexus” would mean goods imported with reference to any of the product groups of the exported goods within the overall value of the entitlement certificate.”

Thereafter a further circular No. 45/2007-Customs dated 19th December 2007 was issued whereby it was further clarified that the term “broad nexus” has to be construed with reference to the words “use” and “inputs” in the FTP, thus restricting the benefit under the TPS by clarifying that only “inputs” used in the manufacture/production of goods exported will be allowed to be imported.

These Circulars and Public Notices which instead of being clarificatory in nature, had the effect of denying the legitimate benefits otherwise intended to accrue to the TPS licence holders by the legislature as a reward for achieving incremental growth in exports.

The above circulars and Public Notices were recently under challenge before the High Court of Delhi in a Writ Petition filed by Indian Exporters Grievance Forum(CIO 2010 Del 2). The High Court after detailed hearing in the matter held that the para 3.7.6 of the Foreign Trade Policy can reasonably be interpreted to require an exporter to show that the goods imported should have a “broad nexus with reference to any product group of the exported goods within the overall value of the entitlement certificate. The word “nexus obviously refers to a larger group of similar goods and not the very exported goods itself. Consequently the impugned circulars and notice that purported to “clarify the term “broad nexus”, i.e. the impugned circular dated 8th May 2007, the Public Notice dated 21st June 2007 and the further circular dated 19th December 2007, travelled beyond what was envisaged by para 3.7.6 of the FTP and severely restricted the benefit thereunder. It was a significant change that could be brought about only through a notification under Section 5 FTDR Act. The said circulars and public notice were, therefore, ultra vires para 3.7.6 of the FTP. Further they sought to retrospectively take away a benefit that had accrued to the exporters which cannot but be viewed as unreasonable in the context. After observing so, the High court quashed the circular dated 8th May 2007, the Public Notice dated 21st June 2007, the further circular dated 19th December 2007 and the amended para 3.2.5 of the Hand Book of Procedure.

This ruling of the High Court of Delhi has set right a wrong perpetuated by the executive through its overzealous actions to deny the accrued benefits intended by the legislature to the exporters, by unduly seeking to restrict the items that could be imported under the Target Plus Scheme. The judiciary needs to be congratulated for not permitting or prohibiting any change in the Hand Book of Procedure made long after the completion of export obligation on the ground of legitimate expectation. The Directorate General of Foreign Trade and Central Board of Excise and Customs basically enjoys executive powers and time and again has violated their jurisdiction and encroached into the area of policy making, conveniently forgetting that law making is the exclusive power vested with the legislature. This judgement is a reminder to the executive that material changes to the Foreign Trade Policy or the Hand Book of Procedure cannot be brought about through circulars and Forms but only by means of an amendment through a notification under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992. The power to make such changes obviously cannot be delegated by the Central Government to the DGFT. It is for these reasons that the amended para 3.2.5 (II) of the Hand Book of Procedure is assailed being beyond the competence of the DGFT and therefore quashed.

Education, coaching and training have become an expensive affair and many children from the poor families can’t afford it. The lack of education and training leads to unemployment and if any organisation is imparting coaching and training to economically weaker section of the society, the same is to be encouraged. All donation and charity towards this cause are also to be appreciated and encouraged.

Section 65 (27) of the Finance Act, 1994 defines “commercial training or coaching centre” to mean “any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the sports, with or without issuance of a certificate and includes coaching or tutorial classes but does not include pre-school coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for the time being in force”

Charitable institutions operate in a varied number of fields like health, education, development, promotion of religion etc for the benefit of society and work on the principles of no-profit no-loss.

Since no fees or charge is collected by these institutions from their students, they were not required to pay any service tax under commercial training or coaching service. But a dispute arose as to whether such charitable institutions were required to pay service tax on the donations or grant-in aid received by them.

Recently, a presentation was made to the central board of excise and customs on behalf of the affected charitable institutions, seeking clarification, whether donations and grants-in-aid received from different sources by a charitable foundation imparting free livelihood training to the poor and marginalised youth, will be treated as ‘consideration’ received for such training and subjected to service tax under ‘commercial training or coaching service’.

After examining this issue in detail the central board of excise and customs, recently vide Circular No. 127/9/2010-ST dated 16.08.2010 clarified that the important point here is regarding the presence or absence of a link between ‘consideration’ and taxable service. It further stated that it is a settled legal position that unless the link or nexus between the amount and the taxable activity can be established, the amount cannot be subjected to service tax. The board further clarified that between the provider of donation/grant and the trainee there is no relationship other than universal humanitarian interest. Thus in such a situation, service tax is not leviable, since the donation or grant-in-aid is not linked to specific trainee or training.

This clarification issued by the board although states that in the absence of link between ‘consideration’ and taxable service, no service tax can be levied on such donations or grant-in aid. The manner of determining the value in service tax is defined as per Rule 3 of the Service Tax (Determination of Value) Rules, 2006 and accordingly, the value of taxable service, where the consideration received is not wholly or partly consisting of money, shall be determined by the service provider in such a manner as equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration.

It further states that where the value can’t be determined, the service provider shall determine the equivalent money value of such consideration, which shall, in no case be less than the cost of provision of such taxable service. However, one only hopes that such clarifications don’t lead to confusion in other areas in days to come.

To err is human. As there is no garden without a weed so is no government without its folly. Underwriting services have been in existence in the ambit of service tax since 1998. CBEC has taken more than 12 years to acknowledge the problem and issues faced by the underwriters.

Recently on August 10, 2010, the ministry came out with a clarification on the issue of underwriters engaged in dealing with government securities. The moot question remains unanswered, as to what will be the state of all pending litigations and what relief government has provided to those underwriters, who have already suffered the trauma of the investigation agencies in these 12 long years and in the process, paid up huge taxes along with interest and penalty.

The CBEC vide their Circular 126/08/2010-ST dated 10.8.2010 refers to representation received seeking clarification whether service tax is leviable on the underwriting commission received by the primary dealers for the auction of government securities. It says that the matter has been examined, but fails to mention the vital issue regarding pending and past matters.

Underwriting service is taxable by virtue of section 65 (105) (z) of the Finance Act, 1994. In the definition of taxable service, two technical terms are mentioned, namely ‘underwriting’ and ‘underwriter’.

The term ‘underwriting’ has the meaning assigned to it, in clause (g) of rule 2 of the Securities and Exchange Board of India (Underwriters) Rules, 1993, which reads as follows: “underwriting means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.” The term “underwriter” has also been borrowed from the Securities and Exchange Board of India (Underwriters) Rules, 1993, which reads as follows: “underwriter means a person who engages in the business of underwriting of an issue of securities of a body corporate.” It is thus clear that under the above definitions ‘underwriter’ or ‘underwriting’ is about dealing in securities of a body corporate.

The Ministry has intervened after a decade and has addressed the related issue requiring resolution as to whether dealing in government securities amounts to dealing in securities of a body corporate, particularly since government securities are issued by the Reserve Bank of India, which is a ‘body corporate’ in terms of section 3 (2) of the RBI Act, 1934. The fact is that government securities are sovereign securities having zero default risk. Reserve Bank of India only manages the issue and also auction of government securities on behalf of the government of India.

In effect, primary dealers registered with the RBI deal in government securities, issued by the RBI on behalf of the government of India, as a part of the central government’s market borrowing programme. This is as opposed to registration with the Securities Exchange Board of India (SEBI). The general practice is that the RBI invites bids from the primary dealers, who in their bids indicate the amount to be underwritten and the underwriting fee expected by them.

RBI examines these bids and decides the amount to be underwritten and underwriting fee to be paid to a primary dealer. Underwriting Fee is also known as underwriting commission in common parlance. Now as per the board circular, the conclusion drawn is that government securities are not securities of a body corporate. Surprisingly, this logic was missing for the past twelve years.

As per the Securities and Exchange Board of India (Underwriters) Rules, 1993, an underwriter is required to enter into a valid agreement with the body corporate on whose behalf he is acting as an underwriter and the said agreement amongst other things may define the allocation of duties and responsibilities between him and such body corporate.

As per the SEBI (Underwriters) Regulations, 1993, he shall also provide for, inter alia, the amount of commission or brokerage payable to the underwriter. Service tax is required to be paid by the underwriter on such commission or brokerage paid to him for the services of underwriting rendered by him.

The underwriting commission varies, depending upon the category of underwriter, whether a financial institution or otherwise and also on the amounts devolving on the public and those devolving on the underwriters.

As the Service tax law stands today, service tax liability doesn’t arise on underwriting fee or underwriting commission received by the primary dealers during the course of the dealing in government securities.

Service Tax on renting of immovable properties was introduced from June 01, 2007 by insertion of section 65(105) (zzzz) in the Finance Act, 1994. The scope of this levy was examined by the Delhi high court in its judgment dated 18.04.2009 delivered in the case of Home Solution Retail India Ltd.v UOI and others (STO 2009 Del 825).

While delivering this judgment, the court held that renting of immovable property for use in the course or furtherance of business of commerce by itself doesn’t entail any value addition and, therefore, cannot be regarded as a service. However, the court categorically stated that there is no dispute that any service connected with the renting of such immovable property would fall within the ambit of Section 65(105) (zzzz) and would be subject to service tax. Subsequent to this judgment, the CBEC issued instructions vide 336/10/2009 TRU dated 15.7.2009 to all service tax formations that the department has filed an appeal against the said order of the Delhi high court, and the dispute has not reached finality.

The Government of India, without awaiting the outcome of the appeal filed in the Supreme Court against the above judgment dated 18.04.2009, inserted an amendment with retrospective effect from 01.06.2007, in the Finance Act, 2010, to the Section 65(105)(zzzz) of the Finance Act, 1994. The amendment that has been introduced by virtue of the Finance Act, 2010 substituted the words “in relation to renting of immovable property” with words “by renting of immovable property or any other service in relation to such renting” in Section 65(105) (zzzz). The tenor of this retrospective amendment strikes at the very root of the observation of the Delhi high court that renting of immovable property can’t be regarded as a service and is introduced with the multiple objective of nullifying the effect of the judgment of Delhi high court and also to deny opportunity to the apex court to finally settle this issue once for all.

This amendment was again challenged by filing writ petitions before the Delhi high court. While admitting the writ petition, the Delhi high court in (STO 2010 Del 296) directed the respondents to file the counter-affidavits within four weeks and the petitioner to file the rejoinder/ affidavits thereto within two weeks thereafter. The high court also directed that there shall be no recovery of service tax from the petitioner in respect of renting of immovable property alone. It was further observed by the court that in the event the writ petition is dismissed, the liability to pay service tax along with any other liability as a result of the demand made will solely be that of the petitioner.

Regarding “any other service in relation to such renting” as appearing in the amended Section 65(105) (zzzz), the high court observed that there is no challenge in the writ petition to the second part of the aforesaid provision, namely, “any other service in relation to such renting” and consequently, if there is any other such service, the service provider would be liable to pay service tax on such service and in respect of this portion of the provision there is no stay.

The net effect of the retrospective amendment to Section 65(105)(zzzz) of Finance Act, 1994 by the Finance Act, 2010 and the observations of Delhi high court in its order dated 18.05.2010, is that the issue of service tax on rentals have now entered its last lap of the race, with both the participants evenly poised. This development has put the landlords in a precarious situation since there are every chances that the Delhi high court may finally decided the issue in the favour of the department and in which event they will be required to shell out service tax on the rentals received from 01.06.2007 onwards. Many landlords who have stopped collecting and paying service tax after the first judgment dated 18.04.2009 of the Delhi high court are now faced with a dilemma as to whether to collect service tax from their clients during the interim period without waiting for the outcome of the Delhi high court case or refrain from doing so, and bear the burden thereof on their own in the eventuality of Delhi high court ruling against the landlords.

The situation further became confusing for assessee, as courts were staying recovery whereas department came up with show cause Notices for collection of service tax. Recently, in Trent Limited Vs Union of India (STO 2010 AP 137) high court observed that pending further order in this application or in the writ petition, department will not initiate any coercive steps for recovery of the service tax on the renting of immovable property by the petitioners, on the basis of the provisions of Section 65 (105) (zzzz) as amended by the Finance Act, 2010, for the period 01/06/2007 to 01/04/2010.

The retrospective amendment has also brought out the devious intentions of the government of not allowing the judiciary to gain upper hand in the matters of levy and collection of taxes and to declare the supremacy of the legislature in these matters of extreme importance in the government of the state. This amendment designed to counter the effects of an undesirable ruling from the perspective of the government will have a singular effect on the role played by the judiciary in review of actions of the legislature for maintaining check and balance in its pursuit to uphold the democratic principles.

At the same time, the prompt action of judiciary also needs to commended, which as hindered the government initiative in levy and collection of taxes by way of introduction of retrospective amendments.