9911796707
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 ..... 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 decision with As on 31 March 2006 As on 31 March 2007 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 35 1137 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rupees) Pending decision with As on 31 March 2006 As on 31 March 2007* Number of cases Duty involved Number of cases Duty involved Court of law 0 0.00 0 0.00 Government of India or Board 0 0.00 0 0.00 Commissioners 1 8.54 0 0.00 Total 1 8.54 0 0.00 Figures furnished by the Ministry and relates to 40 commissionerates of central excise and three commissionerates of service tax. 9.6 Contents This section contains 125 paragraphs featured individually or grouped together with a revenue implication of Rs. 79.02 crore directly attributable to audit pointing out non-compliance with rules/regulations. The Ministry/department have accepted (till November 2007) audit observations in 117 paragraphs involving Rs. 65.49 crore and have recovered Rs. 18.19 crore. 9.7 Impact of audit reports 9.7.1 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 impact of Rs. 491.83 crore in 318 audit paragraphs. Of these, the Government had accepted audit observations in 256 audit paragraphs involving Rs. 188.32 crore and had since recovered Rs. 38.60 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent. Service tax rates adopted at eight per cent with effect from 14 May 2003 by the Finance Act, 2003, Ten per cent from 10 September 2004 by the Finance Act, 2004 and twelve per cent from 18 April 2006 by the Finance Act, 2006, CHAPTER X INCORRECT ASSESSMENT OF SERVICE TAX Rule 6 of the Service Tax Rules, 1994, prescribes that service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the calendar month in which the payments for services are received. Further, where the assessee is an individual or proprietary firm or partnership firm, the tax is required to be paid by the 5th of the month immediately following the quarter in which payment for services are received. Where any service tax has not been paid or has been short paid, the person chargeable with service tax, will, in addition to the tax, be liable to pay interest notified under section 75 of the Finance Act, 1994 and penalty prescribed under section 76 of the said Act. A few illustrative cases of non-levy or incorrect assessment of service tax totalling Rs. 50.30 crore noticed in test check, are mentioned in the following paragraphs. 10.1 Service tax not levi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in the taxable value. The Oil & Natural Gas Corporation Ltd. (ONGC) laid pipelines for the transportation of crude oil through Mumbai Port Trust area. The ONGC was required to pay compensation at half the rate of wharfage charges of crude oil imported through the said pipeline. The port received Rs. 85.01 crore for the period from April 2001 to March 2007 towards compensation but did not pay service tax which worked out to Rs. 5.70 crore. On this being pointed out (February 2006), the Ministry admitted the audit observation and stated (July 2007) that show cause notice for Rs. 5.99 crore had been issued and it was under adjudication process. 10.1.3 Production or processing of goods Services relating to production or processing of goods for or on behalf of a client were brought under the service tax net with effect from 10 September 2004, provided such production or processing did not amount to manufacture within the meaning of section 2(f) of the Central Excise Act, 1944. 10.1.3.1 M/s. Ordnance Factory, in Hyderabad-I commissionerate, obtained base vehicles of different makes from customers and processed them to make the vehicles bullet/mine proof as per the requirements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arges to goods transport agencies. Though these manufacturers were registered under the Factories Act or were established under the Companies Act, yet they did not pay service tax of Rs. 1.07 crore payable on the transportation charges paid between January 2005 and October 2006. On this being pointed out (March and August 2006), the Ministry accepted the audit observations and reported (between September and November 2007) recovery of Rs. 71.54 lakh from fourteen assessees in Bolpur (2), Guntur (3), Hyderabad III (1), Hyderabad V (1), Kolkata III (1), Kolkata V (1), Meerut 11(1), Noida (1), and Pune III (3) and issue of show cause notices for Rs.56.51 lakh to two assessees in Meerut I and Visakhapatnam commissionerates. 10.1.5 Business auxiliary service Business auxiliary service is chargeable to service tax with effect from 1 July 2003 and includes, inter alia, any service in relation to promotion or marketing or sale of goods produced or provided by or belonging to the client. The Board clarified on 20 June 2003 that any incidental or auxiliary market support service provided in relation to evaluation of prospective customer, managing distribution, getting a customer, verifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al testing and analysis services have been brought under the service tax net from 1 July 2003. M/s Mishra Dhatu Nigam Ltd., in Hyderabad II commissionerate, performed activities of operation and maintenance of aeronautical metallurgical testing laboratory building, equipment and machinery, testing and analysis of components required for the Kaveri Engineering Project etc. These activities were connected with testing and evaluation of aero engine material/components and fell within the ambit of technical testing and analysis services. During the period from 2003-04 to 2005-06, the assessee received Rs. 3.12 crore as cost of services on which service tax of Rs. 29.68 lakh was not paid. On this being pointed out (January 2006/July 2006), the Ministry admitted the audit observation and reported (July 2007) issue of a show cause notice. 10.2 Non-payment of Service tax on services obtained from foreign service providers By rule 2(d)(iv) of the Service Tax Rules, 1994 inserted with effect from 16 August 2002, a person receiving taxable services in India has been made liable for payment of Service tax on services provided by a person who is a non resident or is from outside India and doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of excisable goods, received technical consultancy, technical know-how, technical assistance, etc. from foreign consultants and paid service charges aggregating Rs. 29.95 crore between 16 August 2002 and 31 December 2005. However, Service tax of Rs. 1.45 crore leviable thereon was neither paid by the foreign service provider nor by the recipient of services. On this being pointed out (between July 2005 and November 2006), the Ministry admitted the audit observations and reported (between July and December 2007) that show cause notices for Rs. 1.51 crore had been issued or were being issued to the assessees in Kolkata IV, V, Noida and Salem commissiorierates and recovery of tax of Rs. 73,125 from M/s. Phoenix Yule Ltd. 10.2.3 Intellectual property right services Intellectual property right services involving transfer of right to use intangible property were brought under the ambit of Service tax with effect from 10 September 2004. The term intangible property' means trade marks, designs, patents or any other similar intangible property under any law for the time being in force and includes the right to use technical know-how belonging to another person. Two assessees in Bangalore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consultancy services were brought under the ambit of Service tax with effect from 16 July 2001. Section 65 of the Finance Act, 1994 defines scientific and technical consultancy as any advice, consultancy or scientific or technical assistance rendered in any manner either directly or indirectly by a scientist or a technocrat or any science or technology institution or organisation to a client in one or more disciplines of science or technology. M/s. Bharat Electronics Ltd. (BEL), in Hyderabad III commissionerate, engaged in the manufacture of electronic systems, paid (between November 2002 and September 2005) Rs. 2.15 crone to M/s. Elta Electronics Industries Ltd., Israel for providing of technical know-how/technical information, practical application of the state-of-the-art, industrial techniques relating to manufacture, documentation of data, technical and manufacturing assistance in India, training of BEL personnel besides granting exclusive patent rights for five years to the assessee for manufacture and sale of products in India. Though the services fell within the ambit of scientific and technical consultancy services, Service tax of Rs. 20.34 lakh was not paid which was rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this being pointed out (between March 2006 and January 2007), the department admitted the audit observations in two cases and intimated (September 2006) recovery of tax of Rs. 4.62 lakh in a case. In the other two cases, it stated (April and May 2007) that show cause notices for Rs. 25.43 lakh were being issued. In two cases relating to Vapi commissionerate, it contended that the exemption availed of was correct as the assessees had declared that credit had not been availed. The reply is not tenable as declaration was required to be given on each consignment note by the GTA in terms of notification dated 3 December 2004 read with Board's clarification dated 27 July 2005 and hence exemption availed of was not correct. Reply of the Ministry has not been received (November 2007). 10.3.2 Notification dated 16 December 2002, exempts taxable services provided by a consulting engineer to a client on the transfer of technology from so much of the Service tax leviable thereon which is equivalent to the amount of cess paid on the said transfer of technology under the Research and Development Cess Act, 1986. M/s. J.C.B. India Ltd., Ballabhgarh, in Faridabad commissionerate, paid Rs. 6.17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted the audit observation and stated (October 2007) that the demand of Rs. 6.03 lakh had been confirmed in September 2006 but the Commissioner (Appeals) had remanded the case for de novo adjudication. Further developments in the case have not been received (November 2007). 10.5 Loss of revenue due to non-issue of demand notice Short payment or non-payment of Service tax is to be recovered by issuing show cause notice under Section 73 of the Finance Act, 1994 within a period of one year in normal cases. In case of short levy/non-levy due to fraud, collusion, etc. limitation of this period stands extended to five years. M/s. Tamilnadu Ex-Servicemen's Corporation, in Chennai commissionerate of Service tax, provided security service to various clients. The assessee realised service charges from the clients but did not pay Service tax of Rs. 73.96 lakh for the period from 16 October 1998 to 31 March 2000. While the department demanded Service tax from 1 April 2000 onwards which was also paid by the assessee, it did not demand Service tax for the earlier period. This resulted in loss of revenue of Rs. 73.96 lakh to the Government. On this being pointed out (January 2007), the Min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -how in terms of licence, fell within the category of intellectual property services [2006 (3) S.T.R. 438 (Tri. - Bang.) = 2005 (180) E.L.T. 91 (Tri. - Bang.)]. M/s. Inductotherm (India) Private Ltd., in Ahmedabad commissionerate of Service tax, engaged in the manufacture of furnaces of different capacities, paid royalty of Rs. 4.60 crore to Inductotherm Industries Inc. USA during 1 October 2004 to 30 September 2005 for providing technical know-how and transfer of technology. Though this service fell under the definition of intellectual property service, the department issued a show cause notice on 2 August 2005 demanding Service tax of Rs. 20.17 lakh for the period from 1 April 2004 to 31 March 2005 under the head 'consulting engineer services' which was incorrect and was not maintainable. The service receiver was liable to pay Service tax of Rs. 23.45 lakh under intellectual property services. On this being pointed out (December 2005), the Ministry accepted the audit observation and stated (October 2007) that the demand of Rs. 23.45 lakh had been confirmed under intellectual property service, and intimated that the assessee had filed an appeal against the demand before the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l goods. The reply is not tenable 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, the Ministry's reply in this paragraph contradicts its reply given in paragraph 11.1.2 of this report where it has admitted a similar audit observation. 11.1.2 M/s. Mahindra Steel Service Centre Ltd., M/s. Bharat Sanchar Nigam Ltd. (BSNL), Kollam and M/s. NCS Industries Ltd., in Pune I, Thiruvananthapuram and Visakhapatnam II commissionerates respectively, engaged in providing of taxable as well as exempted services, had availed of credit on common input services. The assessees did not maintain separate accounts for taxable and non-taxable services. The credit was, therefore, required to be utilised to the extent of 20 per cent of Service tax payable on output service. However, the assessees utilised input service credit without applying the aforesaid restriction. This resulted in excess utilisation of credit of Rs. 1.20 crore during the period between March 2005 and December 2006. On this being pointed out (between Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r payment of Service tax amounted to Rs. 3.08 crore between September 2004 and March 2007, which was recoverable with interest. On this being pointed out (between September 2005 and April 2007), the Ministry while accepting the audit observations reported (between July and November 2007) recovery of Rs. 1.30 crore in twelve cases. Report on recovery of tax in the remaining cases has not been received (November 2007). 11.4 Availing and utilization of non-permissible cenvat credit 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 services is not admissible in terms of explanation 2(1) below rule 2(K) of the Rules mentioned above. 11.4.1 M/s. Godrej & Boyce Manufacturing Company Ltd. and M/s. Hyva India Private Ltd., hi Mumbai commissionerate of Service tax, availed credit of Rs. 2.69 crore representing Service tax paid on outward transport services beyond the place of removal during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst assessee obtained health insurance policies during 2005-06 for the benefit/welfare of the employees of the company. The second assessee had hired a number of private cabs on a regular basis for meeting their day to day administrative requirements in connection with transportation of their own officials as well as outside personnel visiting the plant. The third assessee had obtained financial advisory services of a bank for disposal of company's shareholding. The Service tax totalling Rs. 49.97 lath paid by them was availed of as Cenvat credit and utilised for payment of duty on final products. Since service so received did not have any nexus with the manufacturing activity, it fell outside the scope of input service. Accordingly, credit of Rs. 49.97 lath was recoverable with interest. On this being pointed out (November 2006 and February 2007), the Ministry while accepting the audit observations reported (October and November 2007) that the show cause notice has been issued to an assessee and it was under issue to other two assessees. 11.6 Credit availed of wrongly on services received prior to 10 September 2004 Rule 3(iv) of the Cenvat Credit Rules, 2004, allows taking of cr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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