Comptroller and Auditor General of India's Report on Indirect Taxes - Service Tax Compliance Audit for 2007-08 (Extracts) Year - Service Tax - Report No. CA 20 of 2009-10

Comptroller and Auditor General of India 's Report on Indirect Taxes - Service Tax Compliance Audit for 2007-08 (Extracts) Year Chapter IX Service Tax Receipts 9.1 Tax administration Service tax was introduced from 1 July 1994 through the Finance Act, 1994 . Administration of service tax has been vested with the Central Excise Department under the Ministry of Finance (the Ministry). The Central Board of Excise and Customs (the Board) has set up a separate apex authority headed by the Director General Service Tax (DGST) at Mumbai for the administration of service tax. Commissioners of central excise/service tax have been authorised to collect service tax within their jurisdiction. 9.2 Trend of receipts Revenue projected through annual budget and actual receipts from service tax during the years 2003-04 to 2007-08 is exhibited in the following table and graph (not printed):- TABLE NO. 1 (Amounts in crore of rupees) Year No. of services subjected to service tax Budget estimates Revised budget estimates Actual receipts* Difference between actual receipts and budget estimates Percentage variation 2003-04 58 8,000 8,300 7,890 (-) 110 (-) 1.38 2004-2005 71 14,150 14,150 14,199 49 0.35 2005-2006 81 17,500 23,000 23,055 5,555 31.73 2006-2007 97 34,500 38,169 37,598 3,098 8.98 2007-2008 104 50,200 50,603 51,301 1,101 2.19 * Figures as per Finance Accounts 9.3 Outstanding demands The number of cases and amount involved in demands for service tax outstanding* for adjudication/recovery as on 31 March 2008 are mentioned in the-following table :- TABLE NO.2 (Amounts in crore of rupees) Pending decision with As on 31 March 2007 As on 31 March 2008 Number of cases Amount Number of cases Amount More than five years Less than five years More than five years Less than five years More than five years Less than five years More than five years Less than five years Adjudicating officers 200 63,503 0.48 1,946.28 196 76,620 0.42 4,092.80 Appellate Commissioners 13 1,011 0.58 172.46 53 1,937 1.59 301.40 Board 0 11 0.00 098 0 6 0.00 0.04 Government 0 3 0.00 1.60 0 1 0.00 0.71 Tribunals 14 955 30.04 897.56 22 1,419 4.24 1,423.05 High Courts 12 104 4.35 43.82 8 155 1.37 66.56 Supreme Court 0 2 0.00 3.10 0 13 0.00 4.01 Pending for coercive recovery measures 83 18,313 6.50 293.25 5,056 14,414 11.17 456.66 Total 322 83,902 41.95 3,359.05 5,335 94,565 18.79 6,345.23 * Figures furnished by the Ministry A total of 99,900 cases involving tax of Rs. 6,364.02 crore were pending as on 31 March 2008 with different authorities, of which 77 per cent in terms of number were with the adjudicating officers of the department. Pendency with these adjudicating officers had been increased from 63,703 in 2006-07 to 76,816 in 2007-08 i.e. an increase of 20.58 per cent and pendency for recovery of demands had increased from 18,396 cases in 2006-07 to 19,470 cases in 2007-08 i.e. an increase of 5.84 per cent. 9.4 Fraud/presumptive fraud cases The position of fraud/presumptive fraud cases, along with the action taken by the department against defaulting assessees during the period 2005-06 to 2007-08 is depicted in the following table :- TABLE NO. 3 (Amounts in crore of rupees) Year Cases detected Demand of duty raised Penalty imposed Duty collected Penalty collected Number Amount Amount Number Amount Amount Number Amount 2005-06 1,790 685.90 484.27 253 9.40 116.88 56 0.53 2006-07 2,466 591.50 287.29 413 56.24 235.65 90 2.77 2007-08 1,716 787.18 574.54 171 179.04 331.74 34 2.74 Total 5,972 2,064.58 1,346.10 837 244.68 684.27 180 6.04 * Figures furnished by the Ministry The above data indicates that while a total of 5,972 cases of fraud/presumptive fraud were detected during the years 2005-08 by the department involving tax of Rs. 2,064.58 crore, it raised demand of Rs. 1,346.10 crore only and recovered Rs. 684.27 crore (50.83 per cent). Similarly, out of the penalty of Rs. 244.66 crore that was imposed, the department could recover only Rs. 6.04 crore (2.47 per cent). 9.5 Contents This section contains 158 paragraphs featured individually or grouped together with a revenue implication of Rs. 276.72 crore. The Ministry/department had accepted (till December 2008) audit observations in 112 paragraphs involving Rs. 47.43 crore and had recovered Rs. 23.22 crore. 9.6 Impact of audit reports 9.6.1 Revenue impact During the last five years (including the current years report), audit through its audit reports had pointed out short levy and other deficiencies with revenue implication of Rs. 726.34 crore in 434 audit paragraphs. Of these, the Government had accepted audit observations in 329 audit paragraphs involving Rs. 195.90 crore and had since recovered Rs. 63.92 crore. The details are shown in the following table :- TABLE NO.4 (Amounts in crore of rupees) Year of Audit Report Paragraph included Paragraphs accepted Recoveries effected Pre printing Post printing Total Pre printing Post printing Total No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount 2003-04 20 17.56 19 17.25 Nil Nil 19 17.25 2 0.33 5 0.41 7 0.74 2004-05 48 86.57 42 35.59 Nil Nil 42 35.59 8 5.41 14 3.00 22 8.41 2005-06 83 266.47 38 28.40 38 28.40 20 7.38 5 1.06 25 8.44 2006-07 125 79.02 117 65.49 1 1.74 118 67.23 60 18.19 30 4.92 90 23.11 2007-08 158 276.72 112 47.43 112 47.43 57 23.22 -- -- 57 23.22 Grand Total 434 726.34 328 194.16 1 1.74 329 195.90 147 54.53 54 9.39 201 63.92 9.6.2 Amendment to Act/Rules The Government had amended Act/Rules addressing the concerns raised by audit through audit reports. Some of these important changes are shown in the following table :- TABLE NO.5 Reference of audit report (AR) paragraph Related issue raised in audit Amendment to Act/Rules etc. Paragraphs 18.1 of AR no. 7 of 2007 and 10.3 of AR no. CA 7 of 2008. Incorrect exemption availed of by the persons other than the goods transport agencies not fulfilling the conditions of the notification dated 3 December 2004. Unconditional exemption provided by Notification No. 13 of 2008-S.T., dated 1 March 2008 from service tax upto 75 per cent of the gross amount charged as freight by GTA. Paragraphs 11.1 of AR no. CA 7 of 2008 Utilisation of cenvat credit by output service provider in excess of the prescribed limit of 20 per cent in cases where input service credit was used in output services not chargeable to tax or exempt from tax without maintaining separate accounts of the use of input services. Rule 6(3) has been amended to provide option either to pay amount at 8 per cent of the value of exempted services or to reverse proportionate credit attributable to inputs and input services used in exempted goods ( Notification No. 10/2008-CE. (N.T.), dated 1 March 2008). Chapter X Grant of Cenvat Credit of Service Tax Cenvat credit of service tax paid on input services was allowed for utilisation against the same output service with effect from 16 August 2002 under the Service Tax Credit Rules, 2002. From 10 September 2004, the said Rules were integrated with the Cenvat Credit Rules, 2004 . Under Cenvat Credit Rules , the credit availed can be utilised for payment of central excise duty on finished goods or service tax payable on output services subject to fulfilment of certain conditions. A few cases of incorrect grant of cenvat credit involving tax of Rs. 177.55 crore, noticed in test check are described in the following paragraphs. Many of these observations relate to companies providing cellular services to public. These observations were communicated to the Ministry through 71 draft audit paragraphs. The Ministry/department had accepted (till December 2008) the audit observations in 43 draft audit paragraphs with money value of Rs. 14.56 crore of which Rs. 4.71 crore had been recovered. 10.1 Utilisation of Cenvat credit not restricted to prescribed limits Rule 3 of the Cenvat Credit Rules, 2004 , allows a provider of taxable service to take credit of specified duties and service tax paid on any input, input service or capital goods received in the premises of the provider of output service on or after 10th day of September 2004. Further, rule 6(3) of the, Cenvat Credit Rules 2004 , provides that where a provider of output service avails of cenvat credit in respect of any inputs or input services and provides such output services which are chargeable to tax or are exempt and does not maintain separate accounts in respect of both category of services, then the provider of output service shall utilise credit only to the extent of an amount not exceeding twenty per cent (35 per cent prior to 10 September 2004) of the amount of service tax payable on taxable output service. 10.1.1 M/s. Vodafone Essar Digilink Ltd., and M/s. Bharti Hexacom Ltd., in Jaipur I commissionerate, engaged in the activity of providing both taxable and exempted cellular phone services, availed cenvat credit on inputs, input services and capital goods. The assessees had not maintained separate account for inputs and input services used in the exempted and taxable services. The assessees provided taxable service on which tax payable was Rs. 103.06 crore during the period from April 2006 to March 2007. The assessees utilised credit Rs. 74.46 crore as against the admissible limit of Rs. 20.61 crore (20 per cent of the tax payable). This resulted in excess utilisation of cenvat credit of Rs. 53.85 crore which was required to be recovered. On this being pointed out (October 2007 and February 2008), the department stated (March 2008) that rule 6 imposed restriction for availing and utilisation of cenvat credit on inputs and input services only and not on capital goods. The reply is not relevant as rule 6(3)(c) of the said Rules restricts utilisation of credit upto 20 per cent of the amount of service tax payable on output service. This means that the remaining eighty per cent of tax is to be paid from PLA/cash Reply of the Ministry had not been received (December 2008). 10.1.2 M/s. Vodafone Essar Cellular Ltd., Coimbatore, in Coimbatore commissionerate and M/s. Bharti Airtel Ltd., Chennai in Chennai commissionerate, engaged in the activity of providing taxable as well as exempted telephone services did not maintain separate account of input services used for the taxable and exempted output services. However, during the period April 2005 to September 2007, the assessees had not restricted the utilisation of the cenvat credit to 20 per cent of the service tax liability. The service tax liability of the assessees for the said period was Rs. 78.36 crore and the admissible limit considering the 20 per cent cap worked out to Rs. 15.67 crore. However, the assessees had utilised credit of Rs. 59.21 crore resulting in excess utilisation of cenvat credit by Rs. 43.54 crore. The observation was pointed out to the department/Ministry between December 2007 and May 2008; its reply had not been received (December 2003). 10.1.3 M/s. Vodafone Essar South Ltd., Chennai (previously M/s. Hutchison Essar South Ltd.), in Chennai commissionerate, engaged in providing telephone service using common input services for taxable as well as exempted services, did not restrict utilisation of the cenvat credit to 20 per cent as envisaged in the foregoing rule. On this being pointed out by the department (September 2005), the assessee paid (December 2005) Rs. 34.89 lakh along with interest towards the excess utilisation of input credit for the period from September 2004 to May 2005. Verification of records by audit revealed that the service tax payable for, the said period was Rs. 7.22 crore and after restriction of the utilisation of credit to 20 per cent, the tax payable in cash was Rs. 5.78 crore, whereas the amount paid in cash (including Rs. 84.89 lakh demanded and paid subsequently) was Ba 4.65 crore. This resulted in short payment of Rs. 1.13 crore as tax, in cash. Similarly, out of the service tax of Rs. 44.38 crore payable for the subsequent period from June 2005 to March 2007, the tax paid in cash was Rs. 21.50 crore as against Rs. 35.50 crore resulting in short payment of service tax in cash, by Rs. 14 crore. Thus, the total excess utilisation of cenvat credit amounted to Rs. 15.13 crore for the period from September 2004 to March 2007 which was required to be paid in cash. Interest under section 75 of the Finance Act, 1994 , was also recoverable. On this being pointed out (December 2007 and February 2008), the department stated (March 2008) that the word 'credit' appearing in rule 6(3)(c) referred to credit of inputs and input services only and the restriction of 20 per cent utilisation was not applicable to the credit of capital goods and further stated that the order in original dated 3 January 2007, confirming demand of Rs. 84.89 lakh, passed by the commissioner, was legal and correct and was accepted by the reviewing authority. Reply of the department is not relevant as rule 6(3)(c) of the Rules restricts utilisation of credit upto 20 per cent of the amount of service tax payable on output service. This means that the remaining eighty per cent of tax is to be paid from PLA or in cash. Further, audit had not questioned the legality and correctness of the order in original dated 3 January 2007 of the commissioner, as an adjudicating authority cannot traverse beyond the demand raised in the show cause notice. Audit had only pointed out that the demand raised itself was short by Rs. 1.13 crore. Reply of the Ministry had not been received (December 2008). 10.1.4 M/s. Spice Communication Ltd., (Mohali), in Chandigarh I commissionerate, was engaged in the activity of providing taxable as well as exempted cellular phone (mobile phone) services and was not maintaining separate accounts in respect of both categories of services. The assessee received Rs. 473.04 crore towards taxable services provided to subscribers during 2006-07 on which service tax of Rs. 57.38 crore was payable. The assessee was entitled to utilise cenvat credit to the extent of Rs. 11.47 crore only and balance of Rs. 45.91 crore was required to be paid in cash. The assessee, however, utilised cenvat credit of Rs. 24.89 crore (Rs. 11.17 crore on inputs plus Rs. 13.72 crore on capital goods) and deposited balance of Rs. 32.49 crore in cash. This resulted in excess utiisation of cenvat credit of Rs. 13.42 crore (Rs. 24.89 crore minus Rs. 11.47 crore) which was required to be recovered along with interest. On this being pointed out (November 2007), the department stated (May 2008) that cenvat credit on capital goods was not covered under the 20 per cent limit. The reply of the department was not relevant because under Rule 6(3)(c) of the Cenvat Credit Rules 2004 , the provider of output service was required to utilise credit only to the extent of an amount not exceeding 20 per cent of the amount of service tax payable on taxable output service. Reply of the Ministry had not been received (December 2008). 10.1.5 M/s. Bharti Airtel Ltd., (formerly known as Bharti Infotech Ltd.), Bhopal, in Bhopal commissionerate, engaged in providing telephone and leased circuit services, availed of cenvat credit on inputs, capital goods and input services used for providing taxable as well as exempted services. The assessee, however, utilised cenvat credit exceeding 20 per cent of their tax liability towards taxable output service which was incorrect. This resulted in excess utilisation of cenvat credit of Rs. 12.05 crore during the period from April 2006 to March 2007, which was required to be paid in cash. The assessee was also liable to pay interest under rule 14 of the said Rules. On this being pointed out (March 2008), the department stated (May 2008) that show cause notice was under issue. Reply of the Ministry had not been received (December 2008). 10.1.6 M/s. Bharat Sanchar Nigam Ltd., Ernakulam, in Cochin commissionerate, availed of cenvat credit of service tax paid on input services and excise duty paid on capital goods. The assessee did not maintain separate accounts and hence was entitled to utilise cenvat credit only to the extent of twenty per cent of the tax liability. However, the assessee, utilised cenvat credit in excess of 20 per cent between July 2006 and August 2006. The credit utilised in excess amounted to Rs. 1.36 crore, which was recoverable with interest. On this being pointed out (January 2007), the department stated (January 2008) that the restriction for using 20 per cent of cenvat credit for payment of service tax applied only for credit on inputs and input services and the assessee had availed credit in excess of 20 per cent on capital goods only which was governed by rule 4(2)(a) and rule 6(4) of the Cenvat Credit Rules, 2004. Reply of the department was not acceptable in view of the explicit provisions of rule 6(3)(c) which restricts utilisation of credit to the extent of twenty per cent of the tax payable on taxable output service. Reply of the Ministry had not been received (December 2008). 10.1.7 M/s. Vodafone (Hutchison Essar South) Ltd., in Hyderabad II commissionerate, engaged in providing cellular phone services, availed of cenvat credit on several inputs, input services and capital goods which were used by them for rendering both taxable and exempted output services. The assessee had not maintained separate accounts for inputs/input services used in exempted services and yet did not restrict the cenvat credit utilisation to the extent of 20 per cent (35 per cent prior to 10 September 2004) as required under the Rules. Non-observance of the prescribed ceiling limits led to excess utilisation of credit of Rs. 1.20 crore, during the periods between July 2003 and February 2005. This amount was required to be paid in cash. On this being pointed out (November 2007), the department stated (March 2008) that the ceiling limits prescribed in the rules do not apply to capital goods credit and hence capital goods credit in its entirety was available for utilisation to the assessee. After setting off the excess utilised amounts against short utilisation during subsequent months including capital goods credit, interest to the extent of Rs. 0.47 lakh was recovered for the period of delay in adjustment. The reply of the department was not relevant as rule 6(3)(c) imposed restriction on the utilisation of cenvat credit with reference to the tax liability of output service which represents not only inputs/input service credit but also credit earned on capital goods. The adjustments allowed by the department between excess utilisation in a month against short utilisation during subsequent month by including the entire amount of capital goods credit was not correct as such an arrangement was not contemplated in the Rules and hence the entire excess credit of Rs. 1.20 crore needs to be recovered along with interest and penalty. Reply of the Ministry had not been received (December 2008). 10.1.8 M/s. Idea Celluar Ltd., in Hyderabad-II commissionerate, engaged in providing cellular phone services availed of cenvat credit on several inputs, input services and capital goods which were used by them for rendering both taxable and exempted output services. The assessee had not maintained separate accounts for input goods/input services used in exempted services and yet did not restrict the cenvat credit utilisation to the extent of 20 per cent (35 per cent prior to 10 September 2004) as required under the Rules. Non-observance of the above ceiling limits led to excess utilisation of credit of Rs. 1.02 crore between September and December 2004 which needs to be recovered along with interest and penalty. On this being pointed out (December 2007), the department stated (July 2008) that the ceiling limits prescribed in the rules do not apply to capital goods credit and hence capital goods credit in it's entirety was available for utilisation. It also stated that after setting off the excess utilised amounts against short utilisation during subsequent months including capital goods credit, interest of Rs. 1.98 lakh was recoverable for the period of delay in adjustment. The reply of the department was not acceptable as adjustment of excess utilisation in a month against short utilisation during subsequent month was not contemplated in the Rules. Further, the contention of the department that the restriction was not applicable to capital goods credit was also not acceptable as rule 6(3)(c) of the Cenvat Credit Rules imposed restriction on the utilisation of cenvat credit which represented not only input goods/input services credit but also credit earned on capital goods. Reply of the Ministry had not been received (December 2008). However, the Ministry had admitted similar audit observations reported vide paragraph No. 11.1.2 of Audit Report No.CA 7 of 2008. 10.2 Cenvat credit of service tax paid on transportation services beyond the place of removal Under the provisions of rule 3 of the Cenvat Credit Rules, 2004 , a manufacturer is allowed to take credit of service tax paid on any 'input service' used in the manufacture of final goods. Service tax paid by the manufacturer for outward transportation of final products beyond the place of removal is not an input service and credit of tax paid on such service is not admissible. Forty assessees in Barigalore (1), Cochin (2), Delhi-III (4), Delhi-IV (3), Guntur (1), Hyderabad-I (3), Haldia (1), Jaipur-II (1), Kolkata-VI (1), Madurai (1), Mumbai-II (1), Mumbai-III (1), Nagpur (5), Pama (1), Pune-III (1), Salem (2), Surat-II (4), Thane-I (3), Trichy (2), Tirunaveli (1) and Vadodara (1) commissionerates, engaged in manufacture of various excisable goods availed cenvat credit of service tax paid on transportation of goods from the factory gate to the customer's premises or from the depot to the customer's premises. However, cenvat credit was also availed of on the service tax paid on outward transportation of the goods exported beyond the place of removal. Availing of cenvat credit was not correct as the sales in these cases were effected at the factory gate or depot. This resulted in incorrect availing of Cenvat credit of Rs. 11.27 crore between January 2005 and August 2007. This was recoverable with interest and penalty. On this being pointed out (between April 2005 and March 2008), the Ministry admitted audit observations in sixteen cases and stated (between June and September 2008) that tax of Rs. 85.37 lakh and interest of Rs. 15.28 lakh had been recovered from seven assessees. It further stated that demand for Rs. 1.80 crore in five cases had been confirmed and show cause notices for Rs. 1.82 crore to five assessees had been issued. In one case relating to Salem comniissionerate, the Ministry while reporting confirmation of demand stated that the matter was already in its knowledge. The reply with respect to Salem commissionerate is not acceptable as the objection was discussed with the department in August 2007 and show cause notice was issued thereafter in September 2007. Reply in the remaining cases had not been received (December 2008). 10.3 Cenvat credit on input services used in non-taxable output services Rule 3 of the Cenvat Credit Rules, 2004 allows credit of duty on input services used by a service provider for rendering of any taxable output service. The rules also allow credit on common input services used by a service provider for providing taxable services/export services and also exempted services subject to observance of certain conditions/limitations on utilisation of credit. The term 'exempted services' as defined in rule 2(e) of the said Rules means taxable services which are exempt from the whole of the service tax leviable thereon and also include services on which no service tax is leviable under section 66 of the Finance Act, 1994 . Section 66 extends its scope of levy only to those services which are notified under section 65 of the Act. Information Technology (IT) services are not covered under section 65 and hence they are not to be regarded either as taxable services or as exempted services for the purpose of allowing cenvat credit on corresponding input services. M/s. Satyam Computer Services Ltd., in Hyderabad- commissionerate, engaged in providing consulting engineers services, man power recruitment agency services etc., availed of cenvat credit on several input services and used such services for rendering taxable as well as non-taxable services (i.e. software development services relating to information technology to various agencies located within and outside India). Service tax credit on input services used in IT services rendered within India/exported out of India was not admissible as IT services cannot be regarded as output services/export of taxable services within the meaning of rule 2(p) of the Cenvat Credit Rules / rule 3 of the Export of Services Rules, 2005 . However, the assessee incorrectly availed credit of the service tax paid on input services used for IT services. The credit attributable to such ineligible IT services for the period 2004-05 to 2006-07 worked out to Rs. 8.81 crore. On this being pointed out (December 2007), the department stated (March 2008) that a service provider who provided both taxable services and non-taxable services (i.e. not covered under service tax act) was not prohibited from availing full credit on common inputs/input services if the utilisation of credit was limited to 20 per cent of the tax payable as laid down in rule 6(3)(c) of the Cenvat Credit Rules . It also argued that availing of credit on common input goods/input services used in software development services for home consumption/export was permissible under cenvat provisions since these input services were not utilised exclusively for such exempted services. The reply of the department was not acceptable as the enabling provisions contained in section 94(2)(ccc) of the Finance Act, 1994 / section 37(2)(xvia) of the Central Excise Act, 1944 , under which cenvat credit rules were framed, limit the scope of cenvat benefits only to taxable services and not to services which are outside the purview of the Finance Act . The term 'exempted services' as defined in rule 2(e) of the said rules covered only taxable services which were covered by section 65 of the Finance Act but were not chargeable with service tax because of exemption. The interpretation given by department for the definition of exempted services was not correct as the word 'includes' appearing in rule 2(e) should not be read in isolation but should be read in conjunction with the word 'taxable services'. The provisions of the Finance Act, 1994 or the Cenvat Credit Rules could not have application to a service which was outside the scope of the Finance Act and hence the credit availed on corresponding input services used in software development services needs recovery along with interest. Reply of the Ministry had not been received (December 2008). Audit recommends that Government should amend the Finance Act to include 'IT services' in the list of services which are liable to service tax. 10.4 Absence of provisions for recovery of Cenvat credit on input services contained in written off output services The Cenvat Credit Rules, 2004 , allows credit on input services used by a service provider for rendering of output service and utilise such credit towards payment of service tax on output service. The amounts billed for by the service provider against customer but not realised are not liable to service tax under the Finance Act, 1994 , as the basis for payment of service tax is actual realisation of cost of service. However, where the cost of service billed for became irrecoverable for any reason and the same was Written off fully in the books of accounts of an assessee, the Cenvat Credit Rules do not provide for recovery of the input service credit attributable to such write off. Rule 3(5C) of the Cenvat Credit Rules, 2004 , provide recovery of cenvat credit on inputs contained in final products destroyed or damaged due to natural cause (prior to this recovery was made under Board's circular of 22 February 1995). 10.4.1 M/s. Vodafone India Ltd., (Hutchison Essar South Ltd.), M/s. Bharti Airtel Ltd., and M/s. Karvy Stock Broking Pvt. Ltd., in Hyderabad commissionerate and M/s. Vodafone Essar Cellular Ltd., Ernakulam, M/s. Idea Cellular Ltd., and Bharti Airtel Ltd., in Cochin commissionerate, engaged in rendering of cellular phone services and stock broking services, had fully written off unrealised amount of service charges of Rs. 124.76 crore pertaining to the period from April 2004 to March 2007. The corresponding cenvat credit of Rs. 2.60 crore, attributable to input services against the above write off was not paid back even though the services to that extent did not suffer service tax. On this being pointed out (between October 2007/May 2008), the department in respect of assessees in Hyderabad-II commissionerate stated (February/March 2008) that as per rule 3(5B) of the Cenvat Credit Rules , reversal of credit was warranted only when inputs or capital goods were written off fully before being put to use, whereas the input services in the instant cases were already consumed in taxable services and input services, unlike inputs or capital goods being intangible, reversal provisions were not applicable to these. The department in respect of assessees in Cochin comniissionerate stated (July 2008) that the restriction of utilisation of cenvat credit was applicable only if the final service was exempt. The reply of the department was not acceptable as cases of write off of output services could not be dealt with differently either because the input services were intangible in nature or because such services were already consumed in the taxable services rendered. Since output goods and output services stand on same footing under Cenvat Credit Rules, cenvat benefits could not be extended to a service on which service tax was not realisable/paid. Reply of the Ministry had not been received (December 2008). 10.4.2 M/s. BPL Mobile Communications Ltd., and M/s. Vodafone India Ltd., in Mumbai commissionerate of service tax, engaged in rendering cellular phone services had shown an amount of Rs. 142.97 crore as dues pertaining to post paid cellular services billed against customers but not realised for the period 2004-05 to 2006-07. Further, the assessees had fully written off such dues The corresponding credit attributable to input services against the above write off was Rs. 1.84 crore which was required to be recovered with interest. On this being pointed out (May 2008), the department stated (September 2008) that there was no provision in the rules to restrict the cenvat credit for written off amount. Reply of the department was not acceptable as the assessee had fully written off the amount billed as it had become irrecoverable, therefore, service tax was not payable on those output services and hence credit availed on input services used for such output services was recoverable. Reply of the Ministry had not been received (December 2008). Audit recommends that Government should introduce appropriate provision in the Cenvat Credit Rules to require reversal of cenvat credit on input services used for written off output services. 10.5 Credit on invalid documents Rule 9(1)(f) of the Cenvat Credit Rules, 2004 envisages that the cenvat credit shall be taken by the provider of output service on the basis of an invoice, a bill or challan issued by an input service provider on or after 10th day of September 2004. 10.5.1 M/s. Kitchen Appliances India Ltd., in Kolkata-III Commissionerate, engaged in the manufacture of colour TV, DVD and refrigerator, availed of input service credit on different category of services on the basis of invoices/bills/challans which were invalid. Audit observed that some of these tax paying documents had not been addressed to the recipient unit at Salt Lake while some other documents had not originated front/distributed by any registered input service distributor on behalf of the company. The assessee had also utilised the credit so taken, incorrectly. This resulted in incorrect availing of input service credit of Rs. 1.47 crore during the period from July 2005 to October 2006. On this being pointed out (December 2006), the department admitted the audit observation and intimated (August 2007) that a demand for Rs. 2.05 crore had been issued covering the period from April 2004 to March 2007. Further developments in the case had not been intimated (December 2008). Reply of the Ministry had not been received (December 2008). 10.5.2 M/s. Bharti Hexacon Ltd., in Jaipur-I commissionerate, engaged in the activity of providing cellular phone service, availed of cenvat credit of service tax of Rs. 99.98 lakh on the basis of debit notes issued in favour of the assessee for call site sharing expenses and leasing bandwidth on different routes in Rajasthan. The availing of service tax credit on the basis of debit notes was incorrect as the same were not specified documents for availing of credit of service tax. On this being pointed out (October 2007 and February 2008), the department stated (April 2008) that the assessee had taken credit on the basis of invoices issued by the service provider. Reply of the department was not acceptable as debit notes were produced to audit in support of claim of cenvat credit. Further, invoices and debit notes were two independent instruments for calling/getting payment from their customers, clients etc., which could not be raised simultaneously for a single transaction. On being pointed out by audit, the word "debit note". was replaced by 'invoice' on these debit notes and deemed converted into invoices which did not bear the serial number as per instructions contained in paragraph 3.2 of the Board's central excise manual. Reply of the Ministry had not been received (December 2008). 10.6 Cenvat credit on ineligible services Rule 3 of the Cenvat Credit Rules, 2004 , provides that a manufacturer of final products may take credit of service tax paid on any input service received if such service is used in the manufacture of final products. As per rule 2(l)(ii) of the said Rules, the term 'input service' for purpose of allowing credit inter-a includes activities relating to business such as accounting, financing, credit rating, share registry, security and inward transportation of inputs etc. Welfare measures such as health insurance coverage, canteen facilities, etc., extended by employer to employees do not come within the ambit of input service. 10.6.1 M/s. Federal Mogul Goetze (India) Ltd., in Chandigarh, M/s. Dr. Reddy's Laboratory Ltd. in Hyderabad-I, M/s. Family Health Plan Ltd. and M/s. Aurobindo Pharma Ltd. (Unit I) in Hyderabad-II, M/s. Microsystems India Ltd. and M/s. Tecumseh Products India Ltd., in Hyderabad-IV and M/s. Bharat Forge Ltd., in Pune-III commissionerates, engaged in the manufacture of various excisable goods/providing insurance auxiliary services, availed of cenvat credit of Rs. 1.65 crore towards service tax paid during the period between April 2003 and March 2008 on medical insurance premia for employees, catering services offered to their employees, event management and investment advisory services etc. The availing of service tax credit on these services was incorrect as such services fell outside the scope of input service. On this being pointed out (between March and December 2007), the Ministry admitted the audit observations in five cases and intimated (between June and November 2008) recovery of Rs. 15.51 lakh, confirmation of demands of Rs. 22.71 lakh and issue of show cause notice for Rs. 7.53 lakh. Reply in the remaining two cases had not been received (December 2008). 10.6.2 The Board clarified on 17 March 2006 that service tax paid on erection and commissioning and maintenance of wind mill is not eligible for cenvat credit as no nexus exists between wind mill and production process, where wind mills are located outside the factory premises. M/s. Ashok Leyland Ltd., in Chennai-I commissionerate, engaged in the manufacture of motor vehicle chassis, paid leasing rentals for the windmills, situated in Coimbatore and Tirunelveli districts and operation and maintenance charges for the wind farm located at Gudimangalam in Coimbatore district. The assessee paid service tax of Rs. 50.48 lakh during the period 2006-07 on lease rentals, operation and maintenance charges, and availed cenvat credit, which was not correct. On this being pointed out (September, October and November 2007), the Ministry admitted the audit observation and reported (June 2008) that show cause notice for Rs. 50.48 lakh had been issued. 10.7 Cenvat credit utilised for payment of tax on input services Rule 3(4)(e) of the Cenvat Credit Rules, 2004 , allows the Cenvat credit of service tax paid on input services for utilisation against service tax payable on output services. Ten assessees one each in Ahmedabad, Chennai and Mumbai commissionerates of service tax, one each in Chennai-III, Delhi-III, Jalandhar, Panchkula and three in Delhi-IV comnuissionerates of central excise, engaged in the manufacture of various excisable goods, availed of Cenvat credit of duty paid on input goods/capital goods and also service tax paid on various input services. The assessee utilised the Cenvat credit for payment of service tax liability towards the goods transport agencies services availed for inward transport of input goods/capital goods. This was not in order as the assessees were not output service provider. The assessee ought to have paid the service tax relating to the said services by cash. Cenvat credit of Rs. 1.11 crore, incorrectly utilized for payment of service tax on the said input services between the period from October 2004 and November 2007 was required to be recovered along with interest. On this being pointed out (between July 2006 and February 2008), the Ministry admitted the audit observation in two cases and stated (June 2008) that demand of Rs. 37 lakh had been confirmed against both the assessees. Reply in the remaining eight cases had not been received (December 2008). 10.8 Cenvat credit relating to other unit Rule 2 (1) of the Cenvat Credit Rules, 2004 , defines input service as any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal. M/s. TVS Motors Ltd., Hosur, in Chennai-III commissionerate, manufacturing mopeds, scooty and motor cycles availed of Cenvat credit of Rs. 2.58 crore during 2004-05 on the service tax paid on the input services which were common to both the units of the assessee at Hosur and Mysore. From April 2005, the assessee transferred the cenvat credit of service tax paid on the input services, relating to the Mysore unit, proportionately at 38 per cent, calculated on the basis of sale value of clearance of vehicles from Mysore unit. However, no such transfer was made for the period from 10 September 2004 to 31 March 2005, which resulted in the incorrect availing of cenvat credit of Rs. 98.15 lakh. On this being pointed out (February and March 2006), the department while admitting the audit observation (April and October 2006) stated that the inadmissible credit worked out to Rs. 1.15 crore which had been recovered in December 2006. Report on recovery of interest had not been received (April 2008). Reply of the Ministry had not been received (December 2008). 10.9 Cenvat credit availed but prescribed amount not paid on exempted final product Rule 6 of the Cenvat Credit Rules, 2004 , stipulates that where a manufacturer avails of cenvat credit in respect of input goods or input services and manufactures such final products which are chargeable to duty as well as exempted goods, then the manufacturer shall maintain separate accounts for receipt, consumption and inventory of input goods and input services used in the manufacture of dutiable and exempted goods. If the exempted goods are other than those specified in sub-rule 3(a) of rule 6 and the manufacturer opts not to maintain separate accounts, then the manufacturer shall pay an amount equal to ten per cent of the sale price of the final goods. M/s. Bayer Crop Science Ltd., in Thane-I Commissionerate, engaged in the manufacture of both dutiable and exempted goods under chapters 30 and 38, cleared resochin under tariff sub-heading 30049056 valued at Rs. 8.07 crore during financial years 2005-06 and 2006-07 without payment of duty. The assessee had availed cenvat credit on common input services such as telephone and pager services, courier services, inward freight etc., and utilised the credit towards payment of duty on the dutiable goods. Since the assessee had not maintained separate account for common input services, the assessee was liable to pay an amount equal to ten per cent of the value of such exempted clearances. This resulted in non-payment of duty of Rs. 92.44 lakh including interest upto December 2007. On this being pointed out (June 2007), the Ministry admitted the audit observation (July 2008) and intimated that show cause notice was under issue. 10.10 Cenvat credit on service tax received prior to 10 September 2004 Rule 3(1) of the Cenvat Credit Rules, 2004 , provides that a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit of service tax paid on any input service received by the manufacturer of final product on or after the 10th day of September 2004. M/s. Phillips Carbon Black Ltd., M/s. TFL Quinn India Ltd., M/s. NRB Bearings Pvt. Ltd., M/s. Hindalco Industries Ltd., and M/s. Hindustan Petroleum Corporation Ltd., in Bolpur, Hyderabad-I, III, Vadodara-II and Visakhapatitam-I Commissionerates respectively, availed of cenvat credit on several input services which were received prior to 10 September 2004 Since services received prior to 10 September 2004 were not eligible for cenvat credit, availing of cenvat credit of Rs. 86.94 lakh upto 9 September 2004 was incorrect. On this being pointed out (between May 2006 and January 2008), the Ministry admitted the audit observation in two cases and stated (June and July 2008) that the tax of Rs. 16.03 lakh had been recovered in one case and a show cause notice for Rs. 41.40 lakh had been issued in another case. Reply in the remaining three cases had not been received (December 2008). 10.11 Utilisation of Cenvat credit paid on behalf of foreign service providers Section 66(A) of the Finance Act, 1994 , read with Taxation of Services (provided from outside India and received in India) Rule, 2006 , stipulates that where any service specified in clause (105) of section 65 is provided by a person who has business or establishment or place of residence, in a country other than India, and received by a person who has business or establishment, or place of residence in India and such service shall, for the purpose of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India. Again, Rule 3(1) (ix) of the Cenvat Credit Rules, 2004 , provides that a manufacturer or producer of final products shall be allowed to take credit of the service tax leviable under section 66 of the Finance Act . It, therefore, follows from the above that cenvat credit of service tax paid under section 66 A is not admissible to any manufacturer of final products. M/s. Vesuvious India Ltd., and M/s. Areva T and D India Ltd., in Kolkata-VI Commissionerate, engaged in the manufacture of excisable products received taxable services provided by foreign consultants/companies. The records disclosed that both the assessees had paid service tax under section 66A on the services provided from outside India and received in India and took credit of the tax thus paid and utilised the credit against duty payable on final goods. Since provisions of the Act and Rules above did not allow such credit of service tax levied under section 66A of the Act, the availing of cenvat credit of Rs. 71.95 lakh during the period between July 2006 and October 2007 was not correct. On this being pointed out (January 2008), the department admitted the audit observation in one case and stated (April 2008) that a show cause notice was under issue. Reply to the other case had not been received (December 2008). Reply of the Ministry had not been received (December 2008). 10.12 Other cases In 19 other cases of grant of Cenvat credit involving tax of Rs. 2.94 crore, the Ministry/department had accepted all audit observations and had reported recovery of Rs. 2.02 crore in 18 cases till December 2008. Chapter XI Non-Levy/Non-Payment of Service Tax Service tax is levied on specified services. The rate of tax has been fixed at 5 per cent upto 13 May 2003, 8 per cent from 14 May 2003, 10 per cent from 10 September 2004 and 12 per cent from 18 April 2006. A few illustrative cases of non-levy/non-payment of service tax totalling Rs. 79.28 crore noticed in test check are mentioned in the following paragraphs. These observations were communicated to the Ministry through 68 draft audit paragraphs. The Ministry/department had accepted (till December 2008) the audit observations in 55 draft audit paragraphs with money value of Rs. 15.68 crore of which Rs. 5.10 crore had been recovered. 11.1 Services rendered by indigenous service providers 11.1.1 Construction of buildings All commercial and industrial constructions have been brought under the purview of service tax with effect from 16 June 2005. As per section 65(25b) of the Finance Act, 1994 , commercial or industrial construction service, inter alia, covers construction of a new building or a civil structure or part thereof, and construction of a pipeline or conduit which is used or to be used primarily for commerce or industry or work intended for commerce or industry but does not include services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. Construction of power plants, oil and gas extraction plants, and refineries etc. fall within the ambit of the definition of commercial and industrial constructions, as these establishments are primarily intended for carrying on business or commerce. M/s. Larsen Toubro Ltd., in Hyderabad-II commissionerate, entered into a contract with M/s. Reliance Industries Ltd., during 2006 for construction of a gas extraction and purification plant in Krishna Godavari Basin near Kakinada in Andhra Pradesh. The terms of agreement inter alia, envisage construction of onshore terminal and infrastructure work consisting of pig receivers, slag catchers, inlet separators, gas dehydration system, laying of under water pipe lines for gas extraction etc., besides civil works such as office buildings, warehouses, approach roads, access and fly over bridges and road widening. During the period from September 2006 to October 2007, the assessee received a total consideration of Rs. 136.75 crore for the above work but applicable service tax of Rs. 16.74 crore was not paid. On this being pointed out (November 2007), the department stated (April 2008) that the issue was in the knowledge of the department and that the Directorate General of Central Excise Intelligence, Chennai Zonal unit had sent a communication on 28 February 2008 stating that the investigation into the case was in advanced stage after which a demand notice would be issued to the assessee. The reply of the department is not acceptable as at the time when audit had raised the issue in November 2007, the department could not produce any proof that the matter was under investigation and also no demand notice was issued to the assessee. Further more, as per the letter received from Directorate General of Central Excise Intelligence (February 2008), the preliminary report itself was communicated to the commissionerate in January 2008 and the matter was reported to be still under investigation. Further developments in the case had not been received (April 2008). Reply of the Ministry had not been received (December 2008). 11.1.2 Intellectual property service Section 65 (55b) of the Finance Act, 1994 , defines 'intellectual property service' to mean transferring temporarily or permitting the use of any intellectual property right. It also means any right to intangible property viz. trade marks, designs, patents or any other similar intangible property. 11.1.2.1 M/s. Air India Ltd., in Mumbai commissionerate of service tax, entered into an agreement with M/s. Air India Charter Ltd., (AICL) in February 2006 for allowing AICL to operate low cost carrier flights on certain route network. Air India allowed AICL to use Air India's international flight rights, its brand name 'Air India' and its domain knowledge. In lieu of this, AICL was required to pay a royalty of 25 per cent of the scheduled service revenue collected on low cost carrier flights. The arrangement was for a temporary usage of such rights and brand name and was effective till March 2008. The assessee collected an amount of Rs. 99.63 crore as royalty from AICL during the year 2005-06 but service tax of Rs. 10.16 crore was not paid which was recoverable with interest and penalty. This was pointed out to the Ministry/department in November 2007; its reply had not been received (December 2008). 11.1.2.2 M/s. Jagatjit Industries Ltd., Hamira, in Jalandhar commissionerate, permitted the use of its trade mark and other intellectual property rights to fourteen manufacturing units of Indian Made Foreign Liquor (IMFL). Under the agreement entered between the assessee and the IMFL manufacturing units, the technical personnel of the assessee company were to check the quality of liquor manufactured by the IMFL manufacturing units and test the quality of raw material and other products used by them. During the financial year 2005-06, the assessee received Rs. 10.95 crore from these units but the applicable service tax of Rs. 1.12 crore was not paid which was recoverable with interest and penalty. On this being pointed out (March 2007), the department stated (September 2007) that a show cause notice demanding service tax of Rs. 3.79 crore for the period from 2004-05 to 2006 was under issue. Reply of the Ministry had not been received (December 2008). 11.1.3 Software and related services 11.1.3.1 Maintenance or repair service was subjected to service tax with effect from 1 July 2003. Maintenance of computer software was exempted from levy of service tax vide notification dated 21 August 2003. The department clarified on 17 December 2003 that computer software was not liable to service tax as the same was not goods. However, the Supreme Court in its judgement in the case of M/s. Tata Consultancy Services [2004 (178) E.L.T. 22] = [2008 -TMI - 4143 - Supreme Court] held that software falls within the definition of goods. The Board vide circular dated 7 October 2005 and 7 March 2006 clarified that maintenance or repair or servicing of software was leviable to service tax with effect from 9 July 2004 i.e. the day exemption notification dated 21 August 2003 was rescinded. M/s. IBM India Pvt. Ltd., Bangalore, in Bangalore commissionerate of service tax, providing software maintenance services, collected service charges of Rs. 33.49 crore from its clients during the period from 9 July 2004 to 7 October 2005. However, service tax of Rs. 3.41 crore leviable thereon was not paid. The department also did not take any action to recover the tax. On this being pointed out (March 2008), the department stated (May 2008) that tax was not recoverable as the action to recover the revenue for the past period was not possible as intent to evade duty on the part of the assessee could not be alleged. The fact remains that failure to take timely action resulted in loss of revenue. The notification dated 21 August 2003 was withdrawn on 9 July 2004 and the Board had clarified on 7 October 2005 and again on 7 March 2006 that tax was leviable from 9 July 2004. Hence, the department should have initiated action to protect Government revenue. Reply of the Ministry had not been received (December 2008). 11.1.3.2 On line information and data base access or retrieval service has been subjected to service tax with effect from 16 July 2001. Section 65 of the Finance Act, 1994 , defines 'on line information and data base access or retrieval service' as any service provided to a customer by a commercial concern, in relation to on line information and data base access or retrieval or both in electronic form through computer network in any manner. M/s. United Telecom Ltd., Bangalore, in Bangalore commissionerate of service tax, entered into a contractual agreement with Andhra Pradesh Technology Services (APTS), an Andhra Pradesh State Government Undertaking, during February 1999, for providing 'on line information and data base access or retrieval services'. The agreement, inter alia, included providing a back bone network for data, video and voice communication throughout the state and district headquarters for application, including video conferencing, voice and data communication services to APTS. The assessee received a sum of Rs. 13.52 crore as service charges from the State Government of Andhra Pradesh, for the period from July 2001 to August 2004. Audit observed that the assessee had neither registered itself under service tax nor did it pay the applicable service tax of Rs. 88.67 lakh. Penalty and interest were also leviable. On this being pointed out (December 2006), the Ministry admitted the audit observation and stated (June 2008) that the demand for Rs. 88.67 lakh raised against the assessee had been confirmed (March 2007) alongwith interest and penalty but CESTAT has stayed recovery. 11.1.4 Drilling, boring and core extraction services Services relating to site formation and clearance, excavation and earthmoving have been brought under service tax net with effect from 16 June 2005. As per section 65 (97a) of the Finance Act, 1994 , the said services inter alia, cover drilling, boring and core extraction services for construction or similar purposes, soil stabilisation, contaminated top soil stripping work etc. M/s. Essar Constructions (India) Ltd., in Visakhapatnam-I commissionerate, engaged in construction services, entered into two separate agreements during 2006-07 with M/s. National Mineral Development Corporation Ltd., (NMDCL) and M/s. Essar Steels Ltd., for execution of certain earth work. The work order placed on M/s. NMDCL envisaged excavation and removal of deposited slime in dry or wet condition from the Kadampal tailing dam including all lifts by mechanical means and transporting it upto a lead of 6 kilometres besides loading, unloading, leveling of soils etc. The scope of the other work order with M/s. Essar Steels Ltd., included clearing of jungle, trees, excavation of soft/hard rock, excavation in borrow soils, providing and laying of stone pitching, providing graded crushed rock filter/sand filter etc., for tailing dam II at Padapur. During the period from January to April 2007, the assessee received a total consideration of Rs. 6.33 crore for the works executed but did not pay the applicable service tax of Rs. 78.21 lakh due thereon. On this being pointed out (November 2007), the department stated (April 2008) that a show cause notice demanding service tax of Rs. 78.21 lakh besides interest and penalty had been issued in March 2008. Reply of the Ministry had not been received (December 2008). 11.1.5 Goods transport agency services 11.1.5.1 Rule 2(l)(d)(v) of the Service Tax Rules, 1994 , stipulates that the recipient of goods transport agency services is liable to pay service tax if recipient of service is a factory, a company, a corporation, a co-operative society etc. M/s. The Chittoor Co-operative Sugars Ltd., and M/s. S.V. Co-operative Sugar Factory Ltd., in Tirupathi commissionerate, and M/s. Sudhakar Irrigation Systems Pvt. Ltd., in Hyderabad-III commissionerate, incurred an amount of Rs. 6.30 crore during the period from January 2005 to June 2007 on the transportation of inputs into their respective factories for use in manufacturing process. However, the applicable service tax of Rs. 56.14 lakh was not paid by the assessees in terms of rule 2(1)(d)(v). On this being pointed out (November 2006 and August 2007), the department accepted the audit observations in all the cases and reported (February/April 2008) that show cause notice for Rs. 92.95 lakh for the period from January 2005 to March 2007 had been issued in the first case. It also intimated that the recovery was being done in the second case and the third assessee had paid (December 2007) service tax of Rs. 3.77 lakh and interest of Rs. 0.47 lakh covering the period from January 2006 to November 2007. Reply of the Ministry had not been received (December 2008). 11.1.5.2 By a Notification No. 32/2004-ST., dated 3 December 2004 , 75 per cent value of the taxable service provided by GTA to a customer is exempt from levy of service tax subject to the conditions that credit of duty paid on inputs or capital goods used for providing such taxable service is not taken and benefit of Notification No. 12/2003-ST., dated 20 June 2003 is not availed by GTA. The Board clarified on 27 July 2005 that the abatement is permissible only if the goods transport agency declared on consignment note issued, to the effect that neither credit on inputs or capital goods used for provision of service has been taken nor benefit of Notification No. 12/2003-ST. has been taken. M/s. Meena Roadways and M/s. Ashapura Transport, in Rajkot commissionerate, raised debit notes on M/s. Meena Agency Pvt. Ltd., in Rajkot for freight charges amounting to Rs. 3.87 crore during November 2006 to March 2007. The assessee was not eligible for 75 per cent abatement since no declaration on consignment note was available as required for availing of abatement. This resulted in non-payment of service tax of Rs. 47.38 lakh which was recoverable with interest and penalty. This was pointed out to the Ministry/department in May 2008; its reply had not been received (December 2008). 11.1.6 Management consultancy services Service tax on management consultancy service has been levied with effect from 16 October 1998. Section 69 of the Finance Act, 1994 , makes a service provider of taxable service liable to get itself registered within 30 days from the date of commencing business of taxable service and where the assessee was already providing service, the date when the service is made taxable under the Act. M/s. SWS India Management Support Service Pvt. Ltd., in Delhi commissionerate of service tax, provided management consultancy services to their clients and recovered Rs. 5.73 crore as consultancy fee between 12 July 2003 and 31 March 2006 as disclosed in the income tax returns and financial records. However, neither did the assessee register itself with the department nor did it pay the applicable service tax of Rs. 53 lakh. Interest and penalty as prescribed under the Act were also leviable. On this being pointed out (January and February 2008), the department stated (July 2008) that the assessee was not registered with the department. Action taken to recover service tax had not been intimated (August 2008). Reply of the Ministry had not been received (December 2008). 11.1.7 Manpower recruitment agency services Any person engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to a client, is liable to collect and pay service tax on the gross amount charged for the services rendered. 11.1.7.1 Bangalore Metropolitan Transport Corporation (BMTC), in Bangalore commissionerate of service tax, provided 'manpower recruitment services' (viz. the supply of application forms, question papers, answer sheets, processing and generation of merit list, etc., for recruitment of personnel for various posts) to the police department, health and family welfare department, forest department and fire department of the Government of Karnataka. The assessee earned Rs. 4.65 crore during the period from April 2002 to March 2007 for providing these services. The applicable service tax of Rs. 49.25 lakh was, however, not paid which was recoverable with interest and penalty. On this being pointed out (August 2007), the Ministry admitted the audit observation and reported (September 2008) recovery of service tax of Rs. 48.10 lakh and interest of Rs. 12.71 lakh. 11.1.7.2 M/s. Marmagoa Steel Ltd., in Goa commissionerate, availed of the services of man power recruitment agencies. Service charges were paid to ten service providers. However, the service providers neither collected applicable service tax from the recipient of services nor they paid the service tax to the Government. Service tax not paid during the period from June 2005 to March 2007 amounted to Rs. 46.84 lakh which was recoverable with interest of Rs. 10.66 lakh and penalty of Rs. 19.67 lakh. On this being pointed out (April 2007), the Ministry admitted the audit observation and intimated (July 2008) that show cause notice for Rs. 66.26 lakh had been issued and an amount of Rs. 42.74 lakh had since been recovered. 11.1.8 Club or association services Section 65(25a) of the Finance Act, 1994 , stipulates that any person or body of persons providing services, facilities or advantage for a subscription or any other amount to its members are covered under the service of 'club or association services' but does not include (i) any body established or constituted by or under any law for the time being in force; (ii) any person or body of persons engaged in the activities of trade union or promotion of agriculture, horticulture or animal husbandry; (iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature and (iv) any person or body of persons associated with press or media. The service came into the ambit of service tax with effect from 16 June 2005. M/s. Confederation of Indian Industry, in Delhi-I commissionerate, engaged in providing services for the subscription to its members received subscription of Rs. 1.90 crore and Rs. 2.15 crore during the period 2005-06 and 2006-07, respectively. As the assessee did not fall under any categories excluded in the above definition, it was liable to pay service tax of Rs. 45.61 lakh on the subscription collected from the members. In addition, the assessee was liable to pay interest and penalty. On this being pointed out (December 2007 and May 2008), the Ministry while admitting the audit observation stated (September 2008) that the matter was already in the knowledge of the department. The fact remains that action to recover tax by issue of show cause notice was taken in April 2008 after flagged the issue in audit. 11.1.9 Cargo handling services Service tax on cargo handling service was levied with effect from 16 August 2002. Section 65(23) of the Finance Act, 1994 defines 'cargo handling service' to mean loading, unloading, packing or unpacking of cargo and includes cargo handling services provided for freight in special containers or for non-containerised freight, services provided by container freight terminal or any other freight terminal, for all modes of transport and cargo handling service incidental to freight. M/s. Jai Jawan Coal Carriers Pvt. Ltd., New Delhi, in Delhi commissionerate of service tax, provided cargo handling services and recovered Rs. 3.65 crore during the period between 2003-04 and 2005-06 as disclosed in the income tax return submitted to the income tax department. However, neither did the assessee register itself with the department nor did it pay the applicable service tax of Rs. 33.11 lakh. This was recoverable with interest and penalty. The mater was referred to the Ministry/department in January and February 2008; its reply had not been received (December 2008). 11.2 Services received from foreign service providers Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 , stipulates that in respect of taxable service provided by a person, who is a non-resident or is from outside India and does not have an office in India, the person receiving the taxable service in India is liable to pay service tax. 11.2.1 Intellectual property right service Section 65(55b) of the Finance Act, 1994 , defines 'intellectual property service' to mean transferring temporarily or permitting the use of any intellectual property right. It also means any right to intangible property viz. trade marks, designs, patents or any other similar intangible property. The gross amount received by the holder of the intellectual property right in relation to this service is taxable with effect from 10 September 2004. 11.2.1.1 M/s. Star India Pvt. Ltd., (assessee) in Mumbai commissionerate of service tax, entered into an agreement with M/s. Satellite Television Asian Region Ltd. (StarL) for grant of rights by StarL to Star India Pvt. Ltd., to distribute and market the channels Star Plus and Star Utsav. Clause 1.1 of the agreement defines StarL marks as 'trade names, trade marks, logos, service marks, copyright and characters' used by StarL and its affiliates and licensors from time to time. Clause 7 provides that the agreement shall continue for a period of 6 years. The assessee used trade marks/trade names and paid an amount of Rs. 114.38 crore during the year 2006-07 in foreign currency. However, service tax of Rs. 14.00 crore leviable thereon was not paid by the assessee (M/s. Star India Pvt. Ltd.). This was pointed out to the Ministry/department in November 2007; its reply had not been received (December 2008). 11.2.1.2 M/s. Areva T D, Perungudi, Chennai, in Chennai commissionerate of service tax engaged in manufacture of circuit breakers paid Its. 8.73 crore as trade mark fee to their parent company in France for the period from April 2005 to December 2006. However, the assessee (M/s. Areva T D, Perungudi) did not pay service tax of Rs. 1.04 crore even though trade mark attracted service tax under intellectual property service. This was pointed out to the Ministry/department in December 2007; its reply had not been received (December 2008). 11.2.2 Consulting engineers, technical know how and related services 11.2.2.1 M/s. Steel Authority of India Ltd., (SAIL) Bhilai, in Raipur commissionerate, paid Rs. 56.23 crore between April 2000 to March 2004 in foreign currency to foreign consultants for receiving technical 'know how'. Service tax of Rs. 3.41 crore was leviable for the period from 16 August 2002 to 31 March 2004 which was not paid by the assessee. This was recoverable with interest. On this being pointed out (October 2004), the Ministry admitted the audit observation and stated (September 2008) that demand of service tax of Rs. 5.88 crore with equal amount penalty of Rs. 5.88 crore had been confirmed (December 2006). 11.2.2.2 M/s. Bosch Chassis India Ltd., Gurgaon, (formerly known as M/s. Kalyani Brakes Ltd., Gurgaon) in Delhi-I commissionerate, availed services of foreign consultants towards services of consulting engineers, intellectual property and technical testing and analysis. The assessee paid service charges of Rs. 19.72 crore to foreign companies during the years 2003-04 and 2005-06, but service tax of Rs. 1.89 crore was not paid. Service tax was recoverable with interest and penalty. On this being pointed out (March 2007), the department intimated (February 2008) that a show cause notice was under issue. Reply of the Ministry had not been received (December 2008). 11.2.2.3 M/s. BHEL-GE Gas Turbine Services Pvt. Ltd., in Hyderabad-II commissionerate, engaged in providing of consulting engineers services, maintenance and repair services etc., received input services such as consulting engineers services, scientific and technical consultancy services, online information and database access or retrieval services, commercial training and coaching services, repair and maintenance services from several foreign agencies during the period from August 2002 to March 2006 and paid Rs. 6.99 crore in foreign currency towards the cost of services. The assessee, however, did not pay the applicable service tax of Rs. 65.36 lakh. On this being pointed out (January 2008), the Ministry admitted the audit observation and intimated (September 2008) that a show cause notice demanding Rs. 84.13 lakh with interest and penalty had been issued. 11.2.2.4 M/s. TFL Quinn India Pvt. Ltd., in Hyderabad IV commissionerate, engaged in the manufacture of leather tanning and leather finishing chemicals and-other miscellaneous chemicals, plastics etc., adopted the technology and technical know how provided by TFL, Germany and their subsidiary companies located in France Italy. As part of the process of transfer of technology, the assessee was extended training facilities by the said foreign agencies for imparting skills to the staff/ technicians of the assessee. The assessee in turn, utilised these skills/technology in his manufacturing operations. During the period from 2002-03 to 2006-07, the assessee made payments aggregating to Rs. 5.86 crore towards the cost of such services but did not discharge applicable service tax liability of Rs. 50.63 lakh. On this being pointed out (August 2006), the Ministry admitted the audit observation, reported (September 2008) recovery of Rs. 32.44 lakh and issue of show cause notice for the recovery of balance amount of Rs. 18.18 lakh. 11.2.2.5 M/s. Goodyear South Asia Tyres Pvt. Ltd., in Aurangabad commissionerate, received technical information including engineering information and technical know-how, technical assistance from M/s. Goodyear Tyre and Rubber Company, Ohio, USA. The assessee paid Rs. 4.13 crore for these services during 2004-05. However, the applicable service tax of Rs. 42.13 lakh was not paid by the recipient of service. On this being pointed out (February 2007), the Ministry admitted the audit observation and intimated (July 2008) that a show cause notice for Rs. 42.13 lakh had been issued. 11.2.2.6 M/s. NPCL Bharuch (amalgamated with M/s. GNFC Ltd.) and M/s. Hindalco Industries Ltd., Bharuch in Vadodara-II commissionerate, paid Rs. 9.14 crore for the consulting engineers services received from foreign consulting engineering agencies between October 1998 and March 2003. However, applicable service tax totalling to Rs. 45.69 lakh was not paid by the service receiver. On this being pointed out (November 2003 and October 2004), the Ministry admitted the audit observation and intimated (October 2008) that in respect of M/s. Hindalco Industries Ltd., demand had been confirmed and in respect of M/s. NPCL, it stated (December 2005 and January 2008) that show cause notice for Rs. 2.65 lakh had been confirmed and four show cause notices for Rs. 1.93 lakh had been issued to the foreign service providers. 11.2.3 Manpower recruitment services M/s. Dr. Reddy's Laboratories Ltd., (Unit I), in Hyderabad-II commissionerate, engaged in the manufacture of bulk drugs and formulations, obtained several services from different foreign companies which, inter-alia included manpower recruitment, scientific and technical consultancy, technical testing and analysis, business auxiliary services and intellectual property right services. The assessee made payments aggregating to Rs. 28.72 crore during the period 2002-03 to 2004-05 towards the cost of such services but did not pay service tax of Rs. 2.79 crore due thereon. On this being pointed out (July 2007), the Ministry admitted the audit observation and stated (July 2008) that a show cause notice for Rs. 2.79 crore had been issued. 11.2.4 Business process outsourcing services M/s. Proctor and Gamble Home Products Ltd, Mandideep, in Bhopal commissionerate, engaged in the manufacture of detergent powder availed 'business process outsourcing' and 'professional consultancy' services from foreign service providers and paid service charges of Rs. 19.68 crore. Neither did the assessee pay the service tax nor was it demanded by the department. This resulted in non-payment of service tax of Rs. 1.61 crore during the period from 16 August 2002 to 31 December 2004. Interest and penalty was leviable in addition to the tax. On this being pointed out (September 2006), the department stated (October 2006) that service tax payable by the person receiving the service in India was notified on 31 December 2004. Thus, service tax was payable by the receiver of any taxable service provided by a person from outside India only with effect from 1 January 2005. The reply of the department is not acceptable because prior to 1 January 2005, the service provided by the foreign agencies fell under the category 'consulting engineers' on which service tax was payable from 16 August 2002 in terms of rule 2(1)(d)(iv). Reply of the Ministry had not been received (December 2008). 11.2.5 Business auxiliary service etc. M/s. Flakt (India) Ltd., Kolkata, in Kolkata-VI commissionerate, engaged in the manufacture of excisable product received services which, inter a included services in the field of international marketing and sales and product support, manufacturing, purchase and administration, taxation and legal matters, treasury and finance management etc., from foreign service providers. The assessee also obtained the right to use the trade mark license of M/s. Flakt Woods Group, AG Switzerland in connection with the sales and marketing of its products. The service charges were paid in foreign currency. However, service tax of Rs. 38.30 lakh payable thereon during the period between January 2003 and December 2004 was not paid, which was recoverable with interest from the recipient of services. On this being pointed out (April 2005), the department stated (September 2007) that a demand of Rs. 88.28 lakh covering the period from January 2003 to December 2006 was under issue. Further developments in this case had not received (December 2008). Reply of the Ministry had not been received (December 2008). 11.3 Other cases In 57 other cases of non-levy/non-payment of service tax of Rs. 736 crore, the Ministry/department had accepted (till December 2008) all audit observations and had reported recovery of Rs. 3.40 crore in 29 cases. Chapter XII Miscellaneous Topics of Interest Some illustrative cases pertaining to non-levy of interest on delayed payment of service tax, incorrect availing of exemption from tax, short levy of service tax due to undervaluation, incorrect classification of services etc., involving revenue implication of Rs. 19.89 crore noticed during test check are mentioned in the follow paragraphs. These observations were communicated to the Ministry through 19 draft audit paragraphs. The Ministry/department had accepted (till December 2008) the audit observations in 14 draft audit paragraphs with money value of Rs. 17.19 crore of which Rs. 13.41 crore had been recovered. 12.1 Interest on delayed payment of tax Section 75 of the Finance Act, 1994 , provides that where a person, liable to pay service tax under section 68 or the Rules made thereunder, fails to pay the tax or any part thereof within the prescribed time, he shall pay interest at the rate of 13 per cent per annum for the period of default. Further, penalty for failure to pay tax is also leviable, in addition to tax and interest, under section 76 of the said Act. 12.1.1 M/s. British Airways, Gurgaon, in Delhi-III commissionerate, provided services as transporter of passengers embarking in India for international journey by air. The assessee charged fare (including service tax) from customers during May 2006 to October 2007 and paid service tax of Rs. 94.94 crore in November and December 2007. The assessee did not pay interest for delayed payment of service tax and the department also did not demand the interest due. This resulted in non-recovery of interest of Rs. 9.04 crore, besides penalty On this being pointed out (December 2007), the department intimated (March 2008) that the interest of Rs. 9.04 crore had been recovered between December 2007 and February 2008. Reply of the Ministry had not been received (December 2008). 12.1.2 M/s. Bharat Sanchar Nigam Ltd. (BSNL), Assam Telecom Circle (Cellular Mobile Service), in Shillong commissionerate failed to deposit the service tax in time on various occasions during the period from 2004-05 to 2006-07, for which interest of Rs. 1.33 crore was recoverable. The internal audit party of the department had pointed out non-payment of interest of Rs. 1.90 lakh and non-payment of service tax of Rs. 7.83 crore for the period from May 2006 to March 2007 in July 2007 but the department did not issue any show cause notice to the assessee for realisation of the interest of Rs. 1.33 crore (including Rs. 1.90 lakh pointed out by internal audit) On this being pointed out (January 2008), the Ministry admitted (November 2008) audit observations in principle. 12.1.3 M/s. Prakash Arts and M/s. ABC Engineering Works in Guntur commissionerate, M/s. Whirlpool of India Ltd., in Delhi commissionerate of service tax and M/s. Ranbaxy Laboratories Ltd., Dewas, in Indore commissionerate, engaged in providing of advertising services, site preparation, excavation services and manufacture of medicaments/organic compounds did not pay quarterly service tax by the due dates during 2005-06 and 2006-07. They paid the amounts with delays ranging from 1 to 288 days. The interest due on such belated payments amounting to Rs. 84.38 lakh was neither paid by the assessee nor was it demanded by the department. On this being pointed out (November 2007), the Ministry while accepting the audit observation intimated (November 2008) recovery of Rs. 8.89 lakh from M/s. ABC Engineering Works. The department also admitted the audit observations in the cases of M/s. Whirlpool of India Ltd. and M/s. Prakash Arts and reported recovery of Rs. 2.85 lakh and Rs. 47.58 lakh respectively. Reply in the remaining cases had not been received (December 2008). 12.2 Interest on wrong credit of Cenvat Rule 14 of the Cenvat Credit Rules, 2004 , provides that where cenvat credit on any input services has been taken or utilised wrongly by a service provider, the same alongwith interest shall be recovered from such provider of output service and the provisions of sections 73 and 75 of Finance Act, 1994 , shall apply mutatis mutandis for effecting such recoveries. M/s. Satyam Computers Services Ltd., in Hyderabad-II commissionerate, engaged in rendering of consulting engineers services, manpower recruitment agency services etc., took credit of Rs. 4.15 crore during the period between February 2006 and July 2007, of the service tax paid on health insurance services obtained from insurance companies for the welfare of their employees. The internal audit wing of the department objected to these wrong credits in August/October 2007 and in pursuance of these objections, the assessee reversed the entire credit on 31 August 2007. However, the interest payable on these incorrect credits from the date of taking credit to the date of reversal, amounting to Rs. 46.37 lakh, was neither paid by the assessee nor was it demanded by the department. On this being pointed out (December 2007), the department stated (May 2008) that since the assessee did not utilise the excess availed amount, charging of interest on the credit lying unutilised was not warranted in view of a plethora of judicial decisions of Tribunals/High Courts [(i) 2006 (205) E.L.T. 24, (ii) 2007 (215) E.L.T. 119 433 and (iii) 2007 (6) S.T.R. 53) Department also stated that the decision of Punjab Haryana High Court in this regard [2007 (214) E.L.T. 173] was upheld by the Supreme Court also [2007 (214) E.L.T. - A-50]. The fact, however remains that under rule 14 of the Cenvat Credit Rules, 2004, it was statutorily required that where cenvat credit had been taken or utilised wrongly, the same alongwith interest was recoverable. The anomalous situation that had cropped up due to above judicial pronouncements needs to be remedied by Government by making the relevant provisions more explicit and unambiguous, as otherwise the provisions of the said rule with regard to recovery of interest were not enforceable even though the assessees commit breach of cenvat provisions by taking wrong credits on ineligible services. Audit recommends that Government should amend the Rules, in view of post judicial pronouncements, to bring the provisions of the rules, consistent with these. Reply of the Ministry had not been received (December 2008). 12.3 Exemption from tax Under notification dated 31 March 2004, all taxable services provided by a person to a developer of special economic zone (SEZ) or a unit located in SEZ are exempt from levy of service tax if such services are consumed within the SEZ subject to fulfillment of certain specified conditions. The Ministry clarified on 28 June 2007 that since the exemption was intended to cover services meant for consumption in SEZ, taxable services provided and consumed within SEZ are only exempt from service tax and services provided outside SEZ and consumed outside SEZ do not qualify for exemption under the aforementioned notification. M/s. Karvy Computer Share Pvt. Ltd., in Hyderabad-II commissionerate, engaged in providing issue and share transfer agent services, undertook initial public offer (IPO) and share transfer services during 2006-07 and 2007-08 on behalf of M/s. Reliance Petroleum Ltd., and realised an amount of Rs. 12.43 crore for these services. They claimed exemption under the said notification on the ground that the said services were intended for consumption in the newly established SEZ of M/s. Reliance Petroleum Ltd., at Jamnagar. The records disclosed that these services were rendered outside the SEZ as per SEBI NSE regulations in connection with issue of shares to public on behalf of their clients. The services could not be considered as having been consumed within the SEZ as the finances mobilised out of these share offerings were wholly monitored/managed and appropriated by their corporate office located in Mumbai. Therefore, the exemption of Rs. 1.52 crore availed by the assessee was incorrect. On this being pointed out (November 2007), the department stated (May 2008) that the Ministry's clarification was applicable to port services, cargo handling services etc., which were physically performed outside SEZ whereas the service in instant case was meant for financing SEZ and was eligible for exemption. It further stated that going by the nature of the services, their physical performance outside SEZ was immaterial as the ultimate consumption had taken place within SEZ and that their registered office which monitored the finances etc., generated out of public issue was located within SEZ. Reply of the department was not acceptable as the corporate office which solicited the services from the assessee and which monitored/managed the finances was located at Mumbai. Even the registered office of the company which was carrying on the administration of the SEZ was also located outside the SEZ and therefore the services rendered by the assessee to these clients stand on same footing as that of a port service or cargo handling service or warehousing service rendered outside/ consumed outside the SEZ as clarified by the Ministry. Reply of the Ministry had not been received (December 2008). 12.4 Splitting of value of services into components to avoid tax Section 67(1) of the Finance Act, 1994 , stipulates that where provision of service is for a consideration in money, service tax is chargeable on the gross amount charged by the service provider for such service rendered by him. M/s. Narayana Coaching Centre, Nellore, in Guntur commissionerate, engaged in providing coaching services collected Rs. 12.53 crore from students towards the cost of coaching services rendered during the period from 16 June 2005 to 31 March 2007. Though all these charges were collected in relation to coaching services offered to hostellers, the assessee bifurcated these charges into tuition fee, mess charges and hostel charges and discharged service tax liability only on part consideration of Rs. 1.53 crore which represented tuition fee alone. The other two components were excluded by the assessee on the plea that they had no nexus to the coaching services rendered by him. This was not correct as all the amounts were collected in relation to rendering of coaching services and hostel and mess facilities were extended to boarders as incidental to the coaching services offered to them. Therefore, these elements were not to be segregated or separated from the total service charges. The service tax liability not discharged by the assessee on the remaining consideration of Rs. 11 crore collected during the years 2005-06 and 2006-07 amounted to Rs. 1.28 crore. On this being pointed out (November 2007), the department while accepting the audit observation stated (April/May 2008) that show cause notices were under issue. Reply of the Ministry had not been received (December 2008). 12.5 TDS not included in value of services The Director General of Service Tax clarified in the 'frequently asked questions' on filing of returns and payment of service tax that tax deducted at source (TDS) is to be included in the gross amount charged and service tax is to be paid on the gross amount including TDS. M/s. Bharat Heavy Electricals Ltd., (HPBP unit), in Trichy commissionerate, engaged in manufacture of boiler components, paid service tax on consulting engineer services received from a foreign service provider. The assessee paid service charges of Rs. 64.56 crore in four installments during the year 2006-07. In respect of first three installments, valued at Rs. 51.89 crore, the assessee did not include the income tax deducted at source of Rs. 5.77 crore in the value of taxable service for the purpose of payment of service tax remitted between August 2006 and December 2006. This resulted in short payment of tax of Rs. 70.53 lakh. On the fourth installment of Rs. 12.67 crore, service tax was, however, paid including the value of TDS. Similarly, the assessee paid (March 2006) lump sum of Rs. 5.65 crore to the foreign service provider M/s. ALSTOM, France, for the service rendered towards consulting engineer service and paid service tax on the value of service excluding the amount of TDS of Rs. 56.46 lakh. This resulted in short payment of service tax of Rs. 5.75 lakh. On these being pointed out (between February 2007 and February 2008), the department reported (May 2007 and February 2008) recovery of service tax of Rs. 76.33 lakh and interest of Rs. 11.34 lakh. Reply of the Ministry had not been received (December 2008). 12.6 Incorrect classification of service Section 65(39a) of the Finance Act, 1994 , stipulates that erection, commissioning or installation means any service provided by a commissioning and installation agency, in relation to erection, commissioning or installation of plant, machinery or equipment. This was made effective from 10 September 2004. The Board clarified on 8 August 2007 that activity of erection of transmission tower would be taxable with effect from 10 September 2004 under erection, commissioning or installation services. M/s. Urja Engineers Ltd., in Vadodara I commissionerate, entered into agreements with various parties (mainly State Electricity Board) for erection of transmission towers. The activities to be performed were excavation, foundation, erection of tower, stringing of conductors and earth wires etc. The assessee obtained registration under commercial or industrial construction service on 12 September 2005. The assessee realised Rs. 6.48 crore as service charges during the period from January 2005 to June 2006 and paid service tax of Rs. 21.81 lakh under commercial or industrial construction service after availing permissible abatement at 33 per cent from the gross value. This was not correct as service tax was leviable under erection, commissioning or installation services and such an abatement was not available under this category of service. Incorrect classification of service resulted in short payment of service tax of Rs. 44.28 lakh. This was pointed out to the Ministry/department in April 2008; its reply had not been received (December 2008). 12.7 Other cases In 140 other similar cases of short payment of service tax of Rs. 4.10 crore, the Ministry/department had accepted all audit observations and had reported recovery of Rs. 3.31 crore in 137 cases till December 2008. [Source : Report No. CA 20 of 2009-10 - Union Government (Indirect Taxes) of the Comptroller and Auditor General of India ]