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TMI BlogComptroller and Auditor General of India's Report on Indirect Taxes — Service tax for 2006-2007 (Extracts)X X X X Extracts X X X X X X X X Extracts X X X X ..... No. of services covered by tax Budget estimates Revised budget estimates Actual receipts* Difference between actual receipts and budget estimates Percentage variation 2002-03 51 6026 5000 4122 (-) 1904 (-) 31.60 2003-04 58 8000 8300 7890 (-)110 (-) 1.38 2004-05 71 14150 14150 14199 49 0.35 2005-06 81 17500 23000 23055 5555 31.73 2006-07 97 34500 38169 37598 3098 8.98 * Figures as per Finance Accounts In 2004-05, 2005-06 and 2006-07, actual collections had been higher than the budget estimates by 0.35, 31.73 and 8.98 per cent respectively. In 2006-07 there was a short fall of Rs. 571 crore in actual receipts against the revised budget estimates. 9.3 Outstanding demands* The number of cases and amount involved in demands for service tax outstanding for adjudication/recovery as on 31 March 2007 are mentioned in the following table Table No. 2 (Amounts in crore of rupees) Pending decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42.03 55.64 228 20.62 7.79 128 0.05 2005-06 564 187.21 60.04 41 1.58 59.72 14 0.02 2006-07 616 208.27 95.47 62 16.53 78.50 4 0.02 Total 1751 537.51 211.15 331 38.73 146.01 146 0.09 * Figures furnished by the Ministry and relates to 40 commissionerates of central excise and three commissionerates of service tax. The above data reveals that while a total of 1,751 cases of fraud/presumptive fraud were detected during the years 2004-07 by the department involving tax of Rs. 537.51 crore, it raised demand of Rs. 211.15 crore only and recovered Rs. 146.01 crore (69.15 per cent). Similarly, out of the penalty of Rs. 38.73 crore that was imposed, the department could recover only rupees nine lakh (0.23 per cent). 9.5 Provisional assessments The number of cases of provisional assessments and the amount involved therein as on 31 March 2006 and 31 March 2007 is exhibited in the following table :- Table No.4 (Amounts in crore of rupees) Pending decision w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 7.38 1 0.15 21 7.53 2006-07 125 79.02 117 65.49 - - 117 65.49 60 18.19 - - 60 18.19 Grand Total 318 491.83 251 187.16 5 1.16 256 188.32 92 33.35 20 5.25 112 38.60 9.7.2 Amendment to Act/Rules During the years 2004 to 2007 (up to March 2007), the Government had amended Act/Rules addressing the concerns raised by audit through audit reports. These changes are shown in the following table :- Table No. 6 Reference of audit report (AR) paragraph Related issue raised in audit Amendment to Act/Rules etc. Paragraphs 15.6 of AR no. 11 of 2005 and 20.5 of AR no. 7 of 2006 Incorrect/unauthorised adjustment of service tax paid in excess Sub-rules (4A) and (4B) of rule 6 of the Service Tax Rules, 1994 had been amended by notification no. 1/2007-ST dated 1 March 2007 which enables the assessees to make adjustment of the amount paid in excess from the amount of service tax liability to be discharged in succ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qualified engineer or an engineering firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering. 10.1.1.1 M/s. Mc Nally Bharat Engineering Company Ltd., Dhanbad, in Ranchi Commissionerate, engaged in the manufacture of plant, machinery, etc. carried out turnkey project business which involved consultancy services in the field of engineering, electrical, mechanical, drawing and engineering, etc. to its clients. The assessee collected service charges of Rs. 214.28 crore during the period April 2003 to March 2005 but service tax of Rs. 19.60 crore leviable thereon was not paid. On this being pointed out (June 2006), the department stated (January 2007) that the issue in question was being examined to ascertain and recover the amount of service tax. R of the Ministry has not been received (November 2007). 10.1.1.2 M/s. Central Electricity Authority, in Delhi commissionerate of service tax, provided consultancy services in design and engineering of power projects to its clients and collected consultancy fee of Rs. 9.63 crore during the period from October 1999 to February ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bit of manufacture, service tax of Rs. 3.31 crore was leviable thereon. Neither did the department demand service tax on the conversion charges nor did the assessee pay any service tax. On this being pointed out (October 2006), the Ministry while admitting the audit observation stated (November 2007) that the irregularity was already noticed by the departmental officers in August 2006. It also reported issue of a show cause notice for Rs. 12.24 crore covering the period from 10 September 2004 to June 2006 to the assessee in May 2007 and recovery of tax of Rs. 1.75 crore in February 2007. The fact remains that the action to recover tax was taken by the department after the irregularity was pointed out in audit. 10.1.3.2 M/s Nicco Corporation Ltd., in Kolkata-III commissionerate, engaged in the manufacture of insulated wires and cables, provided certain services to their customer by using a new technology known as "electron beam irradiation (EBI) technology". The process undertaken included sterilisation of petri dish, dental powder and medical equipment, colouration of diamond, irradiation of 'O' ring and similar jobs by using the above EBI technology. Such services related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate Ltd., in Chennai III and Hyderabad I commissionerates respectively, engaged in the manufacture of passenger cars and hydraulic air cylinders also rendered incidental or auxiliary market support service by way of introducing various sales promotion schemes in the market/or provided the services relating to promotion of products in the market. These services rendered by the assessees fell under the category of business auxiliary services. The assessees collected charges of Rs. 5.80 crore during the period March 2003 and March 2006 but service tax of Rs. 56.02 lakh leviable thereon was not paid. On this being pointed out (between June 2006 and February 2007), the Ministry admitted the audit observation in the case of M/s. Veijan Hydrair Private Ltd . and reported (September 2007) recovery of Rs. 40.49 lakh. In the case of M/s Ford India Private Ltd., it stated (October 2007) that the matter was noticed by the internal audit in September 2006 and a show cause notice for Rs. 76.69 lakh was issued on 5 July 2007. The reply of the Ministry is not tenable as the action to raise demand was taken by the department only after the issue was raised by central excise receipt audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Act, 1994 envisages that "business auxiliary services" means any commercial concern which is engaged in providing any service to any client for promotion or marketing or sale of goods, promotion or marketing of services or any customer care service or any incidental or auxiliary support service such as billing, collection or recovery of cheques, etc. Twenty nine assessees, in Chandigarh (6), Chennai III (1), Coimbatore (2), Faridabad (2), Gurgaon (3), Hyderabad (1), Indore (1), Jalandhar (1), Kolkata III (1), Kolkata IV (1), Ludhiana (3) Noida (1) and Tirupathi (3) commissiorierates of central excise and three in Chennai commissionerate of Service tax entered into agreement with foreign service providers for promotion or marketing of goods production or processu of goods procurement of orders or any customer care services, etc. The assessees paid commission amounting to Rs. 41.32 crore to various foreign service providers towards rendering business auxiliary services during the period between July 2003 and March 2007. However, Service tax of Rs. 4.28 crore leviable thereon was not paid by the service provider/service receiver which should be recovered with interest and pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture of various excisable products acquired technical know-how/technology, trade marks, etc. from different foreign companies. The assessees paid royalty aggregating to Rs. 22.17 crore during the period between 10 September 2004 and 31 March 2006 to the foreign companies but did not discharge Service tax liability of Rs. 1.43 crore. On this being pointed out (between November 2005 and May 2007), the Ministry admitted the audit observations and reported (between July and October 2007) recovery of tax of Rs. 1.36 crore from seven assessees. Report on the recovery of tax from assessees in Kolkata III and Meerut I commissiorierates has not been received (November 2007). 10.2.4 Online information service Online information and database access or retrieval service through computer network was brought into the ambit of Service tax from 16 July 2001. Section 65(75) of the Finance act, 1994, defines the "online information and database access or retrieval" to mean any service provided to a customer by a commercial concern, in relation to online information and database access or retrieval or both in electronic form through computer network. M/s. Bosch Rexroth (India) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, training licence to sell licenced products, etc. did not constitute an agreement for scientific or technical consultancy. It also stated that a show cause notice demanding tax of Rs. 20.33 Iakh had been issued to the assessee in November 2007. The reply of the Ministry is not tenable as the definition of scientific and technical consultancy services encompasses all the activities mentioned in the agreement. The CESTAT in the case of M/s. MRF Ltd . has also held [2006 (3) S.T.R. 434 (Tri. - Chennai) = 2005 (179) E.L.T. 472] that the aforementioned activities fell within the scope of scientific and technical consultancy services. 10.3 Incorrect grant of exemption of Service tax By a notification dated 3 December 2004, seventy five per cent value of the taxable service provided by a goods transport agency (GTA) to a customer is exempt from the levy of Service tax, subject to the conditions that Cenvat credit on inputs or capital goods used for providing such taxable service is not taken and exemption under notification dated 20 June 2003 is not availed of by the GTA. The Board clarified on 27 July 2005 that the person availing of exemption under the notification dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid cess under Research and Development Cess Act but did not pay Service tax of Rs. 31.36 lakh which was leviable thereon after deducting the amount of cess already paid. On this being pointed out (August 2005), the Ministry admitted the audit observation and intimated (September 2007) that show cause notice was being issued. 10.04 Short payment of Service tax due to undervaluation Section 67 of the Finance Act, 1994, envisages that the value of any taxable service shall be the gross amount charged by the service provider. 10.4.1 M/s. Hwashin Automotive India Private Ltd. and M/s. Hanil Lear India Ltd., in Chennai commissionerate of Service tax and M/s. TVS Motor Company in Chennai III commissionerate of central excise, engaged in the manufacture of motor cycles, automobile components, etc. received consulting engineer services or technical consultancy services from foreign service providers and paid Rs. 67.79 crore to them. The assessees paid Service tax at the applicable rates on the value of services after excluding the amount of tax deducted at source from the value of services which was not correct. Incorrect adoption of value, resulted in short payment of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ix responsibility for not issuing the demand notice in time. 10.6 Non-recovery of Service tax from goods transport operators By a notification dated 5 November 1997 effective from 16 November 1997, the recipient of the services of goods transport operators was made liable to pay Service tax at the rate of five per cent of the freight charges paid to goods transport operators. The Supreme Court in the case of Laghu Udyog Bharti [2006(2) S.T.R. 276 (S.C.) = 1999 (112) E.L.T. 365 (S.C.)] held that the recipients of services cannot be made liable to pay Service tax and the rules in this regard were ultra vires of the Finance Act, 1994 . In order to validate the recovery of Service tax from the recipients, the Finance Act, 1994 was amended with retrospective effect vide Section 117 of the Finance Act, 2000. By the Finance Act, 2003, a new Section 71A was introduced requiring service receiver/user of transport operator to file return for the relevant period (i.e. 16 November 1997 to 1 June 1998) within six months from 14 May 2003. Six assessees, in Vadodara II, Bhavnagar and Daman commissionerates of central excise and one in Ahmedabad commissionerate of Service tax, ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct assessment of Service tax, the Ministry/department have accepted the audit observations involving duty of Rs.5.08 crore and have reported recovery of Rs. 3.23 crore in 130 cases till November 2007. CHAPTER XI GRANT OF CENVAT CREDIT Cenvat credit of Service tax paid on specified input services is admissible with effect from 10 September 2004. 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. 28.72 crore, noticed in test audit are described in the following paragraphs. 11.1 Utilisation of Cenvat credit in excess of the admissible limit Rule 3 of the Cenvat Credit Rules, 2004 allows that a provider of taxable service to take the credit of specified duties and Service tax paid on any input goods, input services 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 provides that where a provider of output service avails of Cenvat credit in respect of any inputs or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit observation and intimated (September and October 2007) that while credit of Rs. 31.50 lakh and interest of Rs. 3.31 lakh had been recovered from the first assessee, demand of Rs. 86.80 lakh had been confirmed against the second assessee and show cause notice had been issued for Rs. 14.95 lakh to the third assessee. 11.2 Cenvat credit availed of in excess on capital goods Rule 4 of the Cenvat Credit Rules, 2004 , provides that credit in respect of capital goods received in the premises of the provider of output service at any time in a given financial year, will be taken only for an amount not exceeding fifty per cent of the duty paid on such capital goods in the same financial year. Rule 14, of the same- Rules provides that where the Cenvat credit has been taken or utilised wrongly, it will be recovered with applicable interest. M/s. Bharat Sanchar Nigam Ltd., in Thiruvanathapuram commissionerate, engaged in providing cellular phone service, procured capital goods in July and August 2005. The assessee availed of the full credit of Rs. 6.40 crore as against the admissible credit of Rs. 3.20 crore (i.e 50 per cent of the duty paid during the year 2005-06). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary 2005 and March 2007. As the credit was admissible for outward transport upto the place of removal only, the credit availed of was not correct and was recoverable with interest. On this being pointed out (August 2006 and April 2007), the Ministry while accepting the audit observations reported (November 2007) that the tax of Rs. 31.59 lakh had been paid by one assessee and show cause notice for Rs. 2.37 crore had been issued to the other assessee. 11.4.2 Fifteen units in Bolpur (2), Haldia (2) Hyderabad 1(1), Kolkata III (2), Ludhiana (1), Pune III (1), Salem (1), Surat 11(1), Thane 11(1), Trichirapalli (1), Vapi (2) commissionerates of central excise and one in Kolkatta commissionerate of Service tax, engaged in the manufacture of various excisable goods, availed of credit of Service tax paid on freight for outward transportation of finished goods by road from factory/depot to the buyers premises. Since credit of Service tax paid on such services was not permissible to the manufacturers, credit of Rs. 5.16 crore availed of during the period between the years 2004-05 and 2006-07 was incorrect and was recoverable with interest. On this being pointed out (between February 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit of input service by the manufacturer of final product or by the provider of output services on or after 10 September 2004. M/s. IBP Company Ltd., M/s. Smita Steel Ltd. and M/s. Elecon Engineering Ltd. in Nasik, Thane I and Vadodara I commissionerates of central excise respectively, availed of Cenvat credit of Rs. 20.91 lakh relating to services which were received prior to 10 September 2004. This was not correct and the credit availed of was recoverable with interest, On this being pointed out (between December 2005 and April 2007), the Ministry admitted the audit observation and intimated (October 2007) that ' 20.40 lakh had been recovered and efforts were being made for recovery of the remaining amount with interest. 11.7 Other cases In five other cases of incorrect use of Cenvat credit, the Ministry/department have accepted the audit observations involving tax of Rs. 47.13 lakh and reported recovery of Rs. 13.19 lakh in two cases t111 November 2007. [Source : Report No 7 of 2008 (Indirect Taxes) of the Comptroller and Auditor General of India ] - Circular - Trade Notice - Public Notice - Instructions - Office orders Tax Management India - taxmanagement ..... X X X X Extracts X X X X X X X X Extracts X X X X
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