Tax updates for december 2012 exams

DIRECT TAXES
AND
INDIRECT TAXES
UPDATES

APPLICABLE FOR DECEMBER 2012 EXAMINATION
FOR EXECUTIVE & PROFESSIONAL
PROGRAMME

*Disclaimer-
This document has been prepared purely for academics purposes only and it does not necessarily
reflect the views of ICSI. Any person wishing to act on the basis of this Direct and Indirect Taxes
Updates should do so only after cross checking with the original source.

ATTENTION STUDENTS!
Clarification about Applicability of the latest Finance Act and other changes for Company
Secretaries December, 2012 Examination.
DIRECT TAXES
All students may note that for Direct Taxes, applicable Assessment year for December 2012
Examination shall be 2012-13 (Previous Year 2011-12). Thus, Students are advised to study
Finance Act, 2011 for December 2012 Examination. Further as per the Syllabus, (Executive and
Professional Programme) students are required to update themselves about all the Circulars,
Clarifications, Notifications, etc. issued by the CBDT & Central Government, on or before six
months prior to the date of the respective examinations.
Gift Tax Act has been excluded from the scope of the examination from June 1999 session
onwards unless otherwise informed.
INDIRECT TAXES
Students appearing in the ‘Tax Laws’ (Indirect Tax Portion to the extent of topics covered in the
syllabus, of ‘Executive Programme’) and Advanced Tax Laws and Practice (Professional
Programme) respectively may take note of the following changes applicable for December 2012
Examination.
1. All changes made by the Finance Act, 2012.
2. All Circulars, Clarifications/Notifications issued by CBEC / Central Government effective six
months prior to the date of examination.
Note:
Students of Executive Programme may specifically Note that Changes made in Service Tax by
Finance Act, 2012 shall be applicable for December, 2012 Examinations.

Direct Taxes and Indirect Taxes Updates for December 2012 Examination Page 2

TABLE OF CONTENTS
Contents Page No.
DIRECT TAX LAWS
• Tax Rates 4
• Definition of Charitable Purpose [Section 2(15)] 6
• Exemptions under section 10 6
• Weighted deductions under section 35 7
• Deduction under section36 for Employers contribution towards Pension scheme is 8
allowed
• Deduction under Chapter VI-A 8
• Taxation of certain foreign dividends at a reduced rate 10
• Minimum Alternate Tax 10
• Alternate Minimum Tax for Limited Liability Partnership (LLP) 11
• Rationalisation of Tax on Income distributed to unit holders 11
• Collection of information on requests received from tax authorities outside India 12
• Exemption to a class or classes of persons from furnishing a return of income 12
• Notification for processing of returns in Centralised Processing Centres 13
• Extension of time limit for assessments in case of exchange of information 13
• Modification in the conditions for filing an application before the Settlement 13
Commission
• Power of the Settlement Commission to rectify its orders 14
• Omission of the requirement of quoting of Document Identification Number 15
• Reporting of activities of liaison offices 15
• Recognition to Provident Funds – Extension of time limit for obtaining exemption 15
from Employees Provident Fund Organisation (EPFO)
• Transfer Pricing 16
INDIRECT TAX LAWS
A. SERVICE TAX
• Study X: Levy, Collection and Payment of Service Tax 35
along with CENVAT Credit rules
• Study XI: Service Tax – Background, Administrative and Procedural Aspects 49
B. CENTRAL EXCISE (CENTRAL EXCISE ACT, 1944)
• Procedure for fixation of value under section 4 71
• Recovery of duties not levied or not paid or short levied or short paid or erroneously 74
refunded (Section 11A)
• Penalty for short levy or non-levy of duty in certain cases (Section 11AC) 74
• Power of Arrest, stop, search etc. 74
C. CENVAT CREDIT RULES, 2004 75
D. CUSTOM DUTY (CUSTOMS ACT, 1962)
• Recovery of duties in certain cases (Section 28AAA) 82
• Bail not to be granted in certain cases without hearing public prosecutor Section 83
104A
• Offences to be tried summarily in certain cases 83
• Special provisions exempting additional duty of customs on import of foreign-going 84
vessels into India


DIRECT TAX LAWS
(A) INCOME TAX (INCOME TAX ACT, 1961)

(1) Tax Rates:

(a) In case of Individual or Hindu undivided family or association of persons or body of
individuals or every artificial juridical person:

Upto Rs. 1,80,000 Nil

Rs.1,80,001 to Rs. 5,00,000 10 % of the amount in excess of Rs.1,80,000

Rs. 5,00,001 to Rs. 8,00,000 Rs. 32,000 plus 20 per cent of the amount in excess of
Rs.5,00,000
Rs. 8,00,001 and above Rs. 92,000 plus 30 % of the amount in excess of Rs.
8,00,000

(b) In case of individual, being a woman resident in India, and below the age of sixty years at any
time during the previous year:



Rs. 5,00,001 to Rs. 8,00,000 Rs. 31,000 plus 20 per cent of the amount in excess of
Rs.5,00,000
Rs. 8,00,001 and above Rs. 91,000 plus 30 % of the amount in excess of Rs.
8,00,000

(c) In the case of every individual, being a resident in India, who is of the age of sixty years or
more at any time during the previous year but not more than 80 years on the last day of the
previous year:-



Rs. 5,00,001 to Rs. 8,00,000 Rs.25,000 plus 20 per cent of the amount in excess of
Rs.5,00,000
Rs. 8,00,001 and above Rs.85,000 plus 30 % of the amount in excess of
Rs.8,00,000.

(d) In the case of every individual, being a resident in India, who is of the age of 80 years or more
at any time during the previous year:-



Rs. 5,00,001 to Rs. 8,00,000 20 % of the amount in excess of Rs.5,00,000

Rs. 8,00,001 and above Rs.60,000 plus 30 % of the amount in excess of
Rs.8,00,000.

(e) In the case of every co-operative society:

(1) where the total income does not exceed 10 % of the total income;
Rs. 10,000.

(2) where the total income exceeds Rs. 1,000 plus 20% of the amount by which the total
Rs.10,000 but does not exceed Rs. 20,000. income exceeds Rs. 10,000;

(3) where the total income exceeds Rs. Rs. 3,000 plus 30% of the amount by which the total
20,000 income exceeds Rs. 20,000.

(e) In the case of every firm: On the whole of the total income @30%

(f) In the case of every local authority: On the whole of the total income @30%

(g) In the case of a company:

(i) In the case of a domestic company @30% of the total income.

(ii) In the case of a company other than a domestic company:

(i) on so much of the total income as consists of,:
(a) royalties received from Government or an
Indian concern in pursuance of an agreement
made by it with the Government or the Indian
concern after the 31st day of March, 1961 but
before the 1st day of April, 1976; or

(b) fees for rendering technical services received
from Government or an Indian concern in
pursuance of an agreement made by it with the
Government or the Indian concern after the
29th day of February, 1964 but before the 1st
day of April, 1976, and where such agreement
has, in either case, been approved 50 %; by the 50%
Central Government

(ii) on the balance, if any, of the total income 40 %
Surcharge on income-tax
(i) in the case of every domestic company having a total income exceeding one crore rupees @5%
of such income-tax;


(ii) in the case of every company other than a domestic company having a total income exceeding
one crore rupees @ 2%

2. Definition of Charitable Purpose [Section 2(15)]

“Charitable Purpose” has been defined in section 2(15) which, among others, include “the
advancement of any other object of general public utility”. However, “the advancement of any
other object of general public utility” is not a charitable purpose, if it involves the carrying on of
any activity in the nature of trade, commerce or business, or any activity of rendering any service in
relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective
of the nature of use or application, or retention, of the income from such activity and receipts from
such activities is ten lakh rupees or more in the previous year.

Section 2(15) has been amended to enhance the current monetary limit in respect of receipts from
such activities from ten lakhs rupees to twenty-five lakhs rupees.

3. Exemptions under section 10: Section 10 of the Income-tax Act excludes certain incomes from
the ambit of total income. With the following amendments the scope of section 10 has further been
extended.

(a) Perquisites/Allowances to Chairman/ Members of UPSC [Section 10(45)]

The existing provisions of the Income-tax Act provide for the taxation of any perquisites or
allowances received by an employee under the head "Salaries" unless it is specifically exempt
under the Act. Currently, specified perquisites of the Chief Election Commissioner or Election
Commissioner and the judges of the Supreme Court are exempt from taxation consequent to the
enabling provisions in the respective Acts governing their service conditions. Section 10 has
been amended to extend similar benefit of exemption in respect of specific perquisites and
allowances, which will be notified by the Central Government, received by both serving as well
as retired Chairmen and Members of the Union Public Service Commission.

This amendment shall take effect retrospectively from 1st April, 2008 and will accordingly
apply in relation to the assessment year 2008-09 and subsequent years."

(b) Specified income of notified body or authority or trust or board or commission [Section
10(46)]

A new clause has been inserted in section 10 of the Income-tax Act to provide exemption from
income-tax to any specified income of a body, authority, board, trust or commission which is set
up or constituted by a Central, State or Provincial Act or constituted by the Central Government
or a State Government with the object of regulating or administering an activity for the benefit
of the general public, provided-
(i) it is not engaged in any commercial activity, and
(ii) is notified by the Central Government in this behalf.


The nature and extent of income to be exempted will also be specified by the Central
Government while notifying such entity.

A consequential amendment is made in section 139 of the Act to provide for filing of the return
of income by such notified entity. These amendments are effective from 1st June 2011.

(c) Infrastructure Debt Fund

In order to augment long-term, low cost funds from abroad for the infrastructure sector, it is
made to facilitate setting up of dedicated debt funds.

Section 10 of the Income-tax Act has been amended so as to provide enabling power to the
Central Government to notify any infrastructure debt fund which is set up in accordance with
the prescribed guidelines. Once notified, the income of such debt fund would be exempt from
tax.

It will, however, be required to file a return of income. Section 115A of the Income-tax Act has
also amended to provide that any interest received by a non-resident from such notified
infrastructure debt fund shall be taxable at the rate of five per cent on the gross amount of such
interest income.

A new section 194LB has also insertedto provide that tax shall be deducted at the rate of five
per cent by such notified infrastructure debt fund on any interest paid by it to a non-resident.

These amendments are effective from 1st June 2011.

4. Weighted deductions under section 35:

(a) Weighted deduction for contribution made for approved scientific research programme

Under the existing provisions of section 35(2AA) of the Income-tax Act, weighted deduction
to the extent of 175 per cent is allowed for any sum paid to a National Laboratory or a
university or an Indian Institute of Technology (IIT) or a specified person for the purpose of
an approved scientific research programme.

In order to encourage more contributions to such approved scientific research programmes,
the weighted deduction is increased from 175 per cent to 200 per cent

(b) Investment linked deduction in respect of specified businesses

Under the existing provisions of section 35AD of the Income-tax Act, investment-linked tax
incentive is provided by way of allowing hundred per cent deduction in respect of any
expenditure of capital nature (other than on land, goodwill and financial instrument)
incurred wholly and exclusively, for the purposes of the “specified business”. Two new
businesses are included in “specified business”, under section 35AD(8)(c):


(a) developing and building a housing project under a scheme for affordable housing
framed by the Central Government or a State Government, as the case may be, and notified
by the Board in this behalf in accordance with the guidelines as may be prescribed; and

(b) production of fertiliser in India.

Under section 73A, any loss of a “specified business” (under section 35AD) is allowed set-
off against profit and gains of any other “specified business”. In order to remove any
ambiguity in this regard in respect of the business of hotels and hospitals, the word “new”
is removed from the definition of “specified business” in the case of hotels and hospitals
under section 35AD(8)(c). With this, the loss of an assessee on account of a “specified
business” claiming deduction under section 35AD will be allowed for set off against the
profit of another “specified business” under section 73A, whether or not the latter is eligible
for deduction under section 35AD. Therefore, an assessee who currently operates a hospital
or a hotel would be able to set off the profits of such business against the losses, if any, of a
new hospital or new hotel which begins to operate after 1st April, 2010 and which is eligible
for deduction of expenditure under section 35AD.

5. Deduction under section36 for Employers contribution towards Pension scheme is allowed:

In section 36 of the Income-tax Act, in sub-section (1), after clause (iv), the following shall be
inserted with effect from the 1st day of April, 2012, namely:—

'(iva) any sum paid by the assessee as an employer by way of contribution towards a pension
scheme, as referred to in section 80CCD, on account of an employee to the extent it does not exceed
ten per cent. of the salary of the employee in the previous year.

Explanation.—For the purposes of this clause, "salary" includes dearness allowance, if the terms of
employment so provide, but excludes all other allowances and perquisites;

6. Deduction under Chapter VI-A:

(a) Tax benefits for New Pension System (NPS)

Section 80CCD of the Income-tax Act provides, inter alia, a deduction in respect of
contributions made by an employee as well as an employer to the New Pension System
(NPS) account on behalf of the employee. In view of the provisions of section 80CCE, the
aggregate deduction under sections 80C, 80CCC and 80CCD cannot exceed one lakh rupees.
The allowable deduction under section 80CCD includes both the employee’s as well the
employer’s contribution to the NPS.

Section 80CCE is amended so as to provide that the contribution made by the Central
Government or any other employer to a pension scheme under section 80CCD(2) shall be
excluded from the limit of one lakh rupees provided under section 80CCE.


(b) Deduction for investment in long-term infrastructure bonds

Under the existing provisions of section 80CCF of the Income-tax Act, a sum of Rs. 20,000
(over and above the existing limit of Rs. 1 lakh available under section 80CCE for tax
savings) is allowed as deduction in computing the total income of an individual or a Hindu
undivided family if that sum is paid or deposited during the previous year relevant to the
assessment year 2011-12 in long-term infrastructure bonds as notified by the Central
Government.

Section 80CCF is amended to allow deduction on account of investment in notified long-
term infrastructure bonds for the year 2011-12 (assessment year 2012-13) also.

(c) Extension of sunset clause for tax holiday for power sector

Under the existing provisions of section 80-IA(4)(iv) of the Income-tax Act, a deduction of
profits and gains is allowed to an undertaking which,—
(a) is set up for the generation and distribution of power if it begins to generate
power at any time during the period beginning on 1st April, 1993 and ending on 31st
March, 2011;
(b) starts transmission or distribution by laying a network of new transmission or
distribution lines at any time during the period beginning on 1st April, 1999 and
ending on 31st March, 2011;
(c) undertakes substantial renovation and modernisation of existing network of
transmission or distribution lines at any time during the period beginning on 1st
April, 2004 and ending on 31st March, 2011.

Section 80-IA(4)(iv) is amended to extend the terminal date for a further period of one year,
i.e., upto 31st March, 2012.

(d) Sunset of tax holiday for certain undertakings engaged in commercial production of mineral
oil

Under the existing provisions of section 80-IB(9) of the Income-Tax Act, a seven-year profit-
linked deduction of hundred per cent is available to an undertaking, if it fulfils any of the
following, namely:-
(i) is located in North-Eastern Region and has begun or begins commercial production of
mineral oil before 1st April, 1997;
(ii) is located in any part of India and has begun or begins commercial production of
mineral oil on or after 1st April, 1997;
(iii) is engaged in refining of mineral oil and begins such refining on or after 1st October,
1998 but not later than 31st March, 2012;
(iv) is engaged in commercial production of natural gas in blocks licensed under the VIII
Round of bidding for award of exploration contracts (NELP-VIII) under the New
Exploration Licencing Policy announced by the Government of India
vide Resolution No. O-19018/22/95-ONG.DO.VL, dated 10th February, 1999 and begins
commercial production of natural gas on or after 1st April, 2009;


(v) is engaged in commercial production of natural gas in blocks licensed under the IV
Round of bidding for award of exploration contracts for Coal Bed Methane blocks and
begins commercial production of natural gas on or after
1st April, 2009.

For the purposes of claiming this deduction, all blocks licensed under a single contract,
which has been awarded under the New Exploration Licencing Policy announced by the
Government of India vide Resolution No. O-19018/22/95-ONG.DO.VL dated 10th
February, 1999 or in pursuance of any law for the time being in force or by the Central or a
State Government in any other manner, is treated as a single “undertaking”.

Thus, an undertaking, which is located in any part of India and is engaged in commercial
production of mineral oil, is eligible for the above-mentioned deduction, if it has begun or
begins commercial production of mineral oil at any time after 1st April, 1997.

No sunset date has been provided for such business. It is amended that the aforesaid
deduction available for commercial production of mineral oil will not be available for blocks
licensed under a contract awarded after 31st March, 2011 under the New Exploration
Licencing Policy announced by the Government of India vide Resolution No. O-
19018/22/95-ONG.DO.VL, dated 10th February, 1999 or in pursuance of any law for the
time being in force or by the Central or a State Government in any other manner.
This amendment will take effect from 1st April, 2012 and will, accordingly, apply in relation
to the assessment year 2012-13 and subsequent years.

7. Taxation of certain foreign dividends at a reduced rate
Under the existing provisions of the Income-tax Act, dividend received from foreign companies is
taxable in the hands of the resident shareholder at his applicable marginal rate of tax. Therefore, in
case of Indian companies which receive foreign dividend, such dividend is taxable at the rate of
thirty per cent plus applicable surcharge and cess.

A new section 115BBD is inserted to provide that where total income of an Indian company for the
previous year relevant to the assessment year 2012-13 includes any income by way of dividends
received from a foreign subsidiary company, then such dividends shall be taxable at the rate of
fifteen per cent (plus applicable surcharge and cess) on the gross amount of dividends. No
expenditure in respect of such dividends shall be allowed under the Act.

8. Minimum Alternate Tax
Under the existing provisions of section 115JB(1), a company is required to pay a minimum
alternate tax (MAT) on its book profit, if the income-tax payable on the total income, as computed
under the Act in respect of any previous year relevant to the assessment year commencing on or
after 1st April, 2011, is less than the MAT. The amount of tax paid under the said section is allowed
to be carried forward and set off against tax payable up to the tenth assessment year immediately
succeeding the assessment year in which the tax credit becomes allowable under the provisions of
section 115JAA. The rate of MAT is increased from 18% to 18.5% of such book profit.


9. Alternate Minimum Tax for Limited Liability Partnership (LLP)
The Limited Liability Partnership Act, 2008 (LLP) has come into effect in 2009. The LLP has features
of both a body corporate as well as a traditional partnership. The Income-tax Act provides for the
same taxation regime for a limited liability partnership as is applicable to a partnership firm. It also
provides tax neutrality (subject to fulfilment of certain conditions) to conversion of a private limited
company or an unlisted public company into an LLP.

An LLP being treated as a firm for taxation has the following tax advantages over a company under
the Income-tax Act:-
i) it is not subject to Minimum Alternate Tax;
ii) it is not subject to Dividend Distribution Tax (DDT); and
iii) it is not subject to surcharge.
In order to preserve the tax base vis-à-vis profit-linked deductions, a new Chapter XII-BA
has been inserted in the Income-tax Act containing special provisions relating to certain
limited liability partnerships.

Where the regular income-tax payable for a previous year by a limited liability partnership is less
than the alternate minimum tax payable for such previous year, the adjusted total income shall be
deemed to be the total income of such limited liability partnership and it shall be liable to pay
income-tax on such total income @18.5%. For the purpose of the above,
(i) “adjusted total income” shall be the total income before giving effect to this newly
inserted Chapter XII-BA as increased by the deductions claimed under any section included
in Chapter VI-A under the heading “C – Deductions in respect of certain incomes” and
deduction claimed under section 10AA;
(ii) “alternate minimum tax” shall be the amount of tax computed on adjusted total income
at a rate of eighteen and one-half per cent; and
(iii) “regular income-tax” shall be the income-tax payable for a previous year by a limited
liability partnership on its total income in accordance with the provisions of the Act other
than the provisions of this newly inserted Chapter XII-BA.

The credit for tax (tax credit) paid by a limited liability partnership under this newly inserted
Chapter XII-BA shall be allowed to the extent of the excess of the alternate minimum tax paid over
the regular income-tax. This tax credit shall be allowed to be carried forward up to the tenth
assessment year immediately succeeding the assessment year for which such credit becomes
allowable. It shall be allowed to be set off for an assessment year in which the regular income-tax
exceeds the alternate minimum tax to the extent of the excess of the regular income-tax over the
alternate minimum tax.

10. Rationalisation of Tax on Income distributed to unit holders
Under the existing provisions contained in section 115R(2) of the Income-tax Act, a Mutual Fund is
liable to pay additional income-tax on the amount of income distributed to its unit holders.

Additional income-tax at a higher rate of 30 per cent shall be levied on income distributed by debt
funds to a person other than an individual or HUF.
Section 115R(2) has been amended to provide that the Mutual Fund shall be liable to pay additional
income-tax on such distributed income at the rate of –


(a) 25 per cent if the recipient is an individual or HUF in case of distribution by a money
market mutual fund or a liquid fund;
(b) 30 per cent if the recipient is any other person in case of distribution by a money market
mutual fund or a liquid fund;
(c) 12.5 per cent. if the recipient is an individual or HUF in case of distribution by a debt
fund other than a money market mutual fund or a liquid fund; and
(d) 30 per cent if the recipient is any other person in case of distribution by debt fund other
than a money market mutual fund or a liquid fund.

There will be no change in the rate of income-tax in case of distribution to any individual or HUF.
Distribution of income by an equity-oriented fund shall continue to be exempt from tax.

This amendment is effective from 1st June, 2011.

11. Collection of information on requests received from tax authorities outside India:

Under the existing provisions of section 131(1) of the Income-tax Act, certain income-tax authorities
have been conferred the same powers as are available to a Civil Court while trying a suit in respect
of discovery and inspection, enforcing the attendance of any person, including any officer of a
banking company and examining him on oath, compelling production of books of account and
other documents and issuing commissions.

A new sub-section (2) has been inserted under section 131 to facilitate prompt collection of
information on requests received from tax authorities outside India in relation to an agreement for
exchange of information under section 90 or section 90A of the Income-tax Act. The new sub-
section provides that for the purpose of making an enquiry or investigation in respect of any person
or class of persons in relation to an agreement referred to in section 90 or section 90A, it shall be
competent for any income-tax authority, not below the rank of Assistant Commissioner of Income-
tax, as notified by the Board in this behalf, to exercise the powers currently conferred on income-tax
authorities referred to in section 131(1). The authority so notified by the Board shall be able to
exercise the powers under section 131(1) notwithstanding that no proceedings with respect to such
person or class of persons are pending before it or any other income-tax authority.

Section 131(3) has further been amended so as to empower the aforesaid authority, as notified by
the Board, to impound and retain any books of account and other documents produced before it in
any proceeding under the Act. Similar amendments have also been made in section 133 of the
Income-tax Act.

These amendments are effective from 1st June, 2011.

12. Exemption to a class or classes of persons from furnishing a return of income:

Under the existing provisions contained in section 139(1) of the Income-tax Act, every person, if his
total income during the previous year exceeds the maximum amount which is not chargeable to
income-tax, is required to furnish a return of his income.
In the case of salaried tax payer, entire tax liability is discharged by the employer through
deduction of tax at source. Complete details of such tax payers are also reported by the employer


through Tax Deduction at Source (TDS) statements. Therefore, in cases where there is no other
source of income, filing of a return is a duplication of existing information.

In order to reduce the compliance burden on small tax payer, a sub-section (1C) has been inserted
in section 139. This provision empowers the Central Government to exempt, by notification in the
Official Gazette, any class or classes of persons from the requirement of furnishing a return of
income, having regard to such conditions as may be specified in that notification.

Consequential amendments has also been made to the provisions of section 296 to provide that any
notification issued under section 139(1C) shall be laid before Parliament. These amendments are
effective from 1st June, 2011.

13. Notification for processing of returns in Centralised Processing Centres

Under the existing provisions of section 143(1B) of the Income-tax Act, the Central Government
may, for the purpose of giving effect to the scheme made under section 143(1A), by notification in
the Official Gazette, direct that any of the provisions of the Income-tax Act relating to processing of
returns shall not apply or shall apply with such exceptions, modifications and adaptations as may
be specified in that notification. However, no direction shall be issued after 31st March, 2011.

Section 143(1B) has been amended to extend the existing time limit for issue of notification to 31st
March, 2012. This amendment is retrospectively effective from 1st April, 2011.

14. Extension of time limit for assessments in case of exchange of information

Section 153 of the Income-tax Act provides for the time limits for completion of assessments and
reassessments. In Explanation 1 to section 153 of the Income-tax Act, certain periods specified
therein are to be excluded while computing the period of limitation for completion of assessments
and reassessments.

A new clause (viii) in Explanation 1 to section 153 has been inserted to exclude the time taken in
obtaining information from the tax authorities in jurisdictions situated outside India, under an
agreement referred to in section 90 or section 90A, from the statutory time limit prescribed for
completion of assessment or reassessment.

This clause provides that the period commencing from the date on which a reference for exchange
of information is made by an authority competent under an agreement referred to in section 90 or
section 90A and ending with the date on which the information so requested is received by the
Commissioner, or a period of six months, whichever is less, shall be excluded.

Similar amendments are made to section 153B of the Income-tax Act. These amendments are
effective from 1st June, 2011.

15. Modification in the conditions for filing an application before the Settlement Commission

The existing provisions contained in the proviso to section 245C(1) allow an application to be made
before the Settlement Commission if,—


(i) the proceedings have been initiated against the applicant under section 153A or under
section 153C as a result of search or a requisition of books of account, as the case may be,
and the additional amount of income-tax payable on the income disclosed in the application
exceeds fifty lakh rupees;
(ii) in other cases, if the additional amount of income-tax payable on the income disclosed in
the application exceeds ten lakh rupees.

A new clause (ia) has been inserted in the proviso to section 245C(1) to expand the criteria for filing
an application for settlement by a tax payer in whose case proceedings have been initiated as a
result of search or requisition of books of account.

This clause stipulates that an application can also be made, where the applicant—
(a) is related to the person [referred to in (i) above] in whose case proceedings have been initiated as
a result of search and who has filed an application; and
(b) is a person in whose case proceedings have also been initiated as a result of search, the
additional amount of income-tax payable on the income disclosed in his application exceeds ten
lakh rupees.

As a consequence, a tax payer who is the subject matter of a search would be allowed to file an
application for settlement if additional income-tax payable on the income disclosed in the
application exceeds fifty lakh rupees. Entities related to such a tax payer, who are also the subject
matter of search, would now be allowed to file an application for settlement, if additional income
tax payable in their application exceeds ten lakh rupees. This amendment is effective from 1st June,
2011.

16. Power of the Settlement Commission to rectify its orders

The existing provisions of section 245D(4) of the Income-tax Act provide that the Settlement
Commission may pass an order, as it thinks fit, on the matters covered by the applications received
by it, after giving an opportunity of being heard to the applicant and to the Commissioner. Further,
under section 245F (1), the Settlement Commission has been conferred all the powers which are
vested in an income-tax authority under the Act. An income-tax authority has the power (under
section 154) to amend any order passed by it for the purpose of rectifying any mistake apparent
from the record.

A new sub-section (6B) in section 245D has been inserted so as to specifically provide that the
Settlement Commission may, at any time within a period of six months from the date of its order,
with a view to rectifying any mistake apparent from the record, amend any order passed by it
under section 245D(4).

It is further provided that a rectification which has the effect of modifying the liability of the
applicant shall not be made unless the Settlement Commission has given notice to the applicant and
the Commissioner of its intention to do so and has allowed the applicant and the Commissioner an
opportunity of being heard.


17. Omission of the requirement of quoting of Document Identification Number

Under the existing provisions contained in section 282B of the Income-tax Act, every income-tax
authority shall, on or after the 1st day of July, 2011, allot a computer-generated Document
Identification Number in respect of every notice, order, letter or any correspondence issued by him
to any other income-tax authority or assessee or any other person and such number shall be quoted
thereon.

Considering the practical difficulties due to non-availability of requisite infrastructure on an all
India basis the aforesaid section has been omitted. This amendment will take effect retrospectively
from 1st April, 2011.

18. Reporting of activities of liaison offices

Foreign companies or firms or associations of individuals operate in India through a branch or a
liaison office after approval by Reserve Bank of India. The branch constitutes a permanent
establishment of the foreign entity and is, therefore, required to file a return of income along with
requisite details. A non-resident does not file a return of income with regard to its liaison office on
the ground that no business activity is allowed to be carried out in India.

A new section 285 is, therefore, inserted in the Income-tax Act mandating the filing of annual
information, within sixty days from the end of the financial year, in the prescribed form and
providing prescribed details by non-residents as regards their liaison offices. This amendment will
take effect from 1st June, 2011.

19. Recognition to Provident Funds – Extension of time limit for obtaining exemption from
Employees Provident Fund Organisation (EPFO)

Rule 4 in Part A of the Fourth Schedule to the Income-tax Act provides for conditions which are
required to be satisfied by a Provident Fund for receiving or retaining recognition under the
Income-tax Act. One of the requirements of rule 4 [clause (ea)] is that the establishment shall obtain
exemption under section 17 of the Employees’ Provident Funds and Miscellaneous Provisions Act,
1952 (EPF & MP Act).

Rule 3 in Part A of the Fourth Schedule provides that the Chief Commissioner or the Commissioner
of Income-tax may accord recognition to any provident fund which, in his opinion, satisfies the
conditions specified under the said rule 4 and the conditions which the Board may specify by rules.

The first proviso to sub-rule (1) of rule 3, inter alia, specifies that in a case where recognition has
been accorded to any provident fund on or before 31st March, 2006, and such provident fund does
not satisfy the conditions set out in clause (ea) of rule 4 on or before 31st December, 2010 and any
other conditions which the Board may specify by rules in this behalf, the recognition to such fund
shall be withdrawn. In order to provide further time to the Employees’ Provident Fund
Organization (EPFO) to process the applications made by establishments seeking exemption under
section 17 of the EPF & MP Act, the aforesaid proviso has been amended so as to extend the time
limit from 31st December, 2010 to 31st March, 2012. This amendment will take effect retrospectively
from 1st January, 2011.


20. Transfer Pricing

STUDY X: BASIC CONCEPTS OF INTERNATIONAL TAXATION
Note: Student of Professional Programme shall note that the portion relating to Transfer pricing shall be
replaced with the following matter:
1. Introduction
In the present age of globalization, diversification and expansion, most of the companies are
working under the umbrella of group engaged in diversified fields/sectors leading to large number
of transactions between related parties.

Related Party transaction means the transaction between/among the parties which are
associated by reason of common control, common ownership or other common interest.

The mechanism for accounting, the pricing for these related transactions is called Transfer
Pricing.

Transfer Price refers to the price of goods/services which is used in accounting for transfer of
goods or services from one responsibility centre to another or from one company to another
associated company. Transfer price affect the revenue of transferring division and the cost of
receiving division. As a result, the profitability, return on investment and managerial performance
evaluation of both divisions are also affected.

This may be understood well by the following example

1. Arihant & Companies is a group of Companies engaged in diversified business. One of its
units i.e. Unit X is engaged in manufacturing of automotive batteries. Another Unit Y is
engaged in manufacturing of Industrial Trucks. Unit X is supplying automotive batteries to
Unit Y. In such cases transfer price mechanism is used to account for the transfer of
automotive batteries.

2. XYZ Co. is expert in providing electrical and electronic services. It is engaged in providing
support to its associated company as well as it is engaged in outsourcing contract. If XYZ
Co. provides some services to its associated company, the transaction should be accounted
at price calculated using transfer price mechanism.
2. Importance of Transfer Pricing
Transfer pricing mechanism is very important for following reasons:
1. Helpful in correct pricing of Product/Services - An effective transfer pricing mechanism helps
an organization in correctly pricing its product and services. Since in any organization,
transaction between associated parties occurs frequently, it is necessary to value all
transaction correctly so that the final product/ services may be priced correctly.

2. Helpful in Performance Evaluation - For the performance evaluation of any entity, it is
necessary that all economic transactions are accounted. Calculation of correct transfer price
is necessary for accounting of inter related transaction between two Associated enterprises.


3. Helpful in complying Statutory Legislations : Since related party transaction have a direct
bearing on the profitability or cost of a company, the effective transfer pricing mechanism is
very necessary. For example, if the related party transactions are measured at less value, one
unit may incur loss and other unit may earn undue profit. This will result in income tax
imbalances at both parties end. Similarly, wrong transfer pricing may lead to wrong
payment of excise duty, custom duty /sales tax (if applicable) as well.

3. Transfer Pricing Provisions in India

Increasing participation of multi-national groups in economic activities in India has given rise
to new and complex issues emerging from transactions entered into between two or more
enterprises belonging to the same group. Hence, there was a need to introduce a uniform and
internationally accepted mechanism of determining reasonable, fair and equitable profits and taxes
in India. Accordingly, the Finance Act, 2001 introduced law of transfer pricing in India through
Sections 92 to 92F of the Income Tax Act, 1961 which guides computation of the transfer price and
suggests detailed documentation procedures. Year 2012 brought a big change in transfer pricing
regulations in India whereby government extended the applicability of transfer pricing regulations
to specified domestic transactions which are enumerated in Section 92BA. This would help in
curbing the practice of transferring profit from a taxable domestic zone to tax free domestic zone.

As stated earlier, the fundamental of transfer pricing provision is that transfer price should
represent the arm’s length price of goods transferred and services rendered from one unit to
another unit.

4. What is Arm’s Length Price?
In general arm’s length price means fair price of goods transferred or services rendered. In other
words, the transfer price should represent the price which could be charged from an independent
party in uncontrolled conditions. Arm’s length price calculation is very important for a company.
In case the transfer price is not at arm’s length, it may have following consequences
A. Wrong performance evaluation
B. Wrong pricing of final product (In case where the goods/services are used in the
manufacturing of final product)
C. Non compliances of applicable laws and thus attraction of penalty provisions.
The same may be explained with the following examples
Company X and Company Y is working under the common umbrella of Mohan & Company.
Company X manufactures a product which is raw material for Company Y.

Case Criteria Effect on Company Effect on Company
X Y
1 Company X charges The revenue of company The total cost of
price more than the X will increase. company Y will
Arm’s length price increase. This will
from Company Y result into wrong
pricing of its product wh -
ich may further lead to unco-
mptetiveness of its product


2 Company X charges The revenue of company The total cost of
price less than the X will decrease. The company Y will
Arm’s length price parent company may decrease. Therefore,
from Company Y close the company X the company Y may
treating it as loss making charge lower price
entity. which may lead to loss
at an entity level.

3 Company X charges The revenue of company Company Y will be
Arm’s Length price X will be representing paying the price as
from Company Y true and fair view of its equivalent to market
operation. price of Company X product
and its cost will be correct. On the basis
of the cost arrived after considering the
arm’s length price of company X
product, company Y will be able to take
correct price decision.

“The concept of associated enterprises and International transaction are very important for
applying the transfer pricing provisions. Section 92A and Section 92B deals with these two
important concepts of chapter X of Income Tax Act, 1961.”

5. Associated Enterprises (AE)

Associated Enterprises has been defined in Section 92A of the Act. It prescribes that “associated
enterprise”, in relation to another enterprise, means an enterprise—
(a) Which participates, directly or indirectly, or through one or more intermediaries, in the
management or control or capital of the other enterprise; or
(b) In respect of which one or more persons who participate, directly or indirectly, or through
one or more intermediaries, in its management or control or capital, are the same persons
who participate, directly or indirectly, or through one or more intermediaries, in the
management or control or capital of the other enterprise.
Thus, from above definition we may understand that
The basic criterion to determine an AE is the participation in management, control or capital
(ownership) of one enterprise by another enterprise whereby the participation may be direct or
indirect or through one or more intermediaries, control may be direct or indirect.
Deemed Associated Enterprises
As per Section 92(2), two enterprises shall be deemed to be associated enterprises if, at any time
during the previous year,—
(a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent
of the voting power in the other enterprise; or
(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-
six per cent of the voting power in each of such enterprises; or
(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one
per cent of the book value of the total assets of the other enterprise; or


(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other
enterprise; or
(e) more than half of the board of directors or members of the governing board, or one or more
executive directors or executive members of the governing board of one enterprise, are
appointed by the other enterprise; or

(f) more than half of the directors or members of the governing board, or one or more of the
executive directors or members of the governing board, of each of the two enterprises are
appointed by the same person or persons; or

(g) the manufacture or processing of goods or articles or business carried out by one enterprise
is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention, model, design,
secret formula or process, of which the other enterprise is the owner or in respect of which
the other enterprise has exclusive rights; or

(h) ninety per cent or more of the raw materials and consumables required for the manufacture
or processing of goods or articles carried out by one enterprise, are supplied by the other
enterprise, or by persons specified by the other enterprise, and the prices and other
conditions relating to the supply are influenced by such other enterprise; or

(i) the goods or articles manufactured or processed by one enterprise, are sold to the other
enterprise or to persons specified by the other enterprise, and the prices and other
conditions relating thereto are influenced by such other enterprise; or

(j) where one enterprise is controlled by an individual, the other enterprise is also controlled
by such individual or his relative or jointly by such individual and relative of such
individual; or

(k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is
controlled by a member of such Hindu undivided family or by a relative of a member of
such Hindu undivided family or jointly by such member and his relative; or

(l) where one enterprise is a firm, association of persons or body of individuals, the other
enterprise holds not less than ten per cent interest in such firm, association of persons or
body of individuals; or

(m) there exists between the two enterprises, any relationship of mutual interest, as may be
prescribed
In Summary, two enterprises will be deemed as Associated Enterprises if
Quantum of Interest Criteria applied for Associated Enterprises
26% or more Shareholding with voting power – either direct or indirect
51% or more Advancement of loan by one entity to other constituting certain
percentage of the book value of the total assists of the other entity


51% or more Based on the board of directors appointed by the governing board of the
entity in the other

90% or more Based on the quantum of supply of raw materials and consumables by
one entity to the other

10% or more Total Borrowing Guarantee by one enterprise for other
10% or more Interest by a firm or association of Person (AOP) or by a body of
Individual (BOI) in other firm AOP or firm or BOI

6. Meaning of International Transaction

International Transaction have been defined vide Section 92B of Income Tax Act. It provides
that “International Transaction” means a transaction between two or more associated enterprises,
either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or
intangible property, or provision of services, or lending or borrowing money, or any other
transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall
include a mutual agreement or arrangement between two or more associated enterprises for the
allocation or apportionment of, or any contribution to, any cost or expense incurred or to be
incurred in connection with a benefit, service or facility provided or to be provided to any one or
more of such enterprises.

Deemed International Transaction

As per Section 92B(2) of Income Tax Act, A transaction entered into by an enterprise with a
person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to
be a transaction entered into between two associated enterprises, if there exists a prior agreement in
relation to the relevant transaction between such other person and the associated enterprise, or the
terms of the relevant transaction are determined in substance between such other person and the
associated enterprise.
7. Transfer Pricing – Methods
Section 92C of Income Tax Act defines the methods which are to be used in determination of Arm's
Length prices for International Transaction and specified domestic transaction. The arm's length
price in relation to an international transaction/specified domestic transaction shall be determined
by any of the following methods, being the most appropriate method, having regard to the nature
of transaction or class of transaction or class of associated persons or functions performed by such
persons or such other relevant factors as the Board may prescribe, namely :-
(A) Comparable Uncontrolled Price Method (CUP)
(B) Resale Price Method (RPM)
(C) Cost Plus Method (CPM)
(D) Profit Split Method (PSM)
(E) Transactional Net Margin Method (TNMM)
(F) Such other method as may be prescribed by the Board.


Various transfer pricing methods which are prescribed by Income Tax Act, 1961 are as under:
(A) Comparable Uncontrolled Price Method
Comparable Uncontrolled Price (“CUP”) method compares the price charged for property or
services transferred in a controlled transaction to the price charged for property or services
transferred in a comparable uncontrolled transaction in comparable circumstances.
An Uncontrolled price is the price agreed between the unrelated parties for the transfer of
goods or services. If this uncontrolled price is comparable with the price charged for transfer of
goods or services between the Associated Enterprises, then that price is Comparable Uncontrolled
Price (CUP). This is the most direct method for the determination of the Arms’ length price.
Methods of CUP
CUP can be either
(a) Internal CUP or
(b) External CUP
Internal CUP is available, when the tax payer enters into a similar transaction with unrelated
parties, as is done with a related party as well. This is considered a very good comparable, as the
functions performed, processes involved, risks undertaken and assets employed are all easily
comparable – more so, on “an apple to apple basis”.
The external CUP is available if a transaction between two independent enterprises takes place
under comparable conditions involving comparable goods or services. For example an independent
enterprise buys or sells a similar product, in similar quantities under similar term from / to another
independent enterprise in a similar market will be termed as external CUP.
Applicability of the CUP Method
Comparable Uncontrolled Price method is treated as most reliable method of transfer pricing
calculation but it is not easy to find the controllable price method easily. The CUP is believed to be
the most reliable / best method, if one could identify and map it. CUP method can be applied
without any difficulty in following circumstances.
(1) Interest payment on a loan
(2) Royalty payment
(3) Software development where products are often licensed to a third party
(4) Price charged for homogeneous items like traded goods
(B) Resale Price Method
Rule 10B (1) (b) of Income Tax Rules, 1962 prescribes Resale Price method by which,
A. The price at which property purchased or services obtained by the enterprise from an
associated enterprise is resold or are provided to an unrelated enterprise is identified;
B. Such resale price is reduced by the amount of a normal gross profit margin accruing to the
enterprise or to an unrelated enterprise from the purchase and resale of the same or similar
property or from obtaining and providing the same or similar services, in a comparable
uncontrolled transaction, or a number of such transactions;


C. The price so arrived at is further reduced by the expenses incurred by the enterprise in
connection with the purchase of property or obtaining of services;
D. The price so arrived at is adjusted to take into account the functional and other differences,
including differences in accounting practices, if any, between the international transaction*
and the comparable uncontrolled transactions, or between the enterprises entering into such
transactions, which could materially affect the amount of gross profit margin in the open
market;
E. The adjusted price arrived at under sub-clause (iv) is taken to be an arms length price in
respect of the purchase of the property or obtaining of the services by the enterprise from
the associated enterprise.
Example
1. A sold a machine to B (Associated enterprise) and in turn B sold the same machinery to C
(an independent party) at sale margin of 30% for Rs 2,10,000 but without making any
additional expenses and change. Here Arm’s length price would be calculated as
Sales price to B = 2, 10,000
Gross Margin = 10,000 * 30% = 63,000
Transfer price = 1, 47,000
2. A sold a machine to B (Associated enterprise) and in turn B sold the same machinery to C
(an independent party) at sale margin of 30% for Rs 4,00,000 but B has incurred 4000 in
sending the machine to C. Here Arm’s length price would be calculated as
Sales price to B = 4, 00,000
Gross Margin = 4,00,000*30%=1, 20,000
Balance = 2, 80,000
Less : Expenses incurred by B = 4,000
Arm’s length price= 2,76,000
(C) Cost Plus Method
Rule 10B (1) (c) of Income tax Rules, 1962 prescribes Cost Plus Method, by which,
(i) The direct and indirect costs of production incurred by the enterprise in respect of property
transferred or services provided to an associated enterprise, are determined;
(ii) The amount of a normal gross profit mark-up to such costs (computed according to the
same accounting norms) arising from the transfer or provision of the same or similar
property or services by the enterprise, or by an unrelated enterprise, in a comparable
uncontrolled transaction, or a number of such transactions, is determined;
(iii) The normal gross profit mark-up so determined is adjusted to take into account the
functional and other differences, if any, between the international transaction and the
comparable uncontrolled transactions, or between the enterprises entering into such
transactions, which could materially affect such profit mark-up in the open market;
(iv) The costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at
under sub-clause (iii);


(v) The sum so arrived at is taken to be an arm’s length price in relation to the supply of the
property or provision of services by the enterprise.
Under the Cost Plus Method, an arm’s-length price equals the controlled party’s cost of
producing the tangible property plus an appropriate gross profit mark-up, defined as the ratio of
gross profit to cost of goods sold (excluding operating expenses) for a comparable uncontrolled
transaction.
The formulas for the transfer price in inter company transactions of products are as follows:
TP = COGS x (1 + mark-up), where:
• TP = Transfer Price of a product sold between a manufacturing company and a related
company;
• COGS = Cost of goods sold of the manufacturing company
• Cost plus mark-up = gross profit mark-up defined as the ratio of gross profit to cost of
goods sold
Gross profit is defined as sales minus cost of goods sold.
As an example, let us assume that the COGS in a transaction between two associated enterprises
is Rs. 5,000. Assume that an arm’s length gross profit mark-up that Associated Enterprise 1 should
earn is 50%. The resulting transfer price between Associated Enterprise 1 and Associated Enterprise
2 is Rs. 7,500 [i.e. Rs. 5,000 x (1 + 0.50)].
In this method, calculation of cost of goods sold and gross margin are the most important factor.
(D) Profit Split Method
Rule 10B (1) (d) of Income tax Rules, 1962 prescribes Profit Split Method, which may be
applicable mainly in international transactions* involving transfer of unique intangibles or in
multiple international transactions which are so interrelated that they cannot be evaluated
separately for the purpose of determining the arm's length price of any one transaction, by which:
(i) The combined net profit of the associated enterprises arising from the international
transaction in which they are engaged, is determined;
(ii) The relative contribution made by each of the associated enterprises to the earning of such
combined net profit, is then evaluated on the basis of the functions performed, assets
employed or to be employed and risks assumed by each enterprise and on the basis of
reliable external market data which indicates how such contribution would be evaluated by
unrelated enterprises performing comparable functions in similar circumstances;
(iii) The combined net profit is then split amongst the enterprises in proportion to their relative
contributions, as computed above;
(iv) The profit thus apportioned to the assessee is taken into account to arrive at an arm’s length
price in relation to the international transaction.
However, the combined net profit as determined in sub-clause (i) may, in the first instance, be
partially allocated to each enterprise so as to provide it with a basic return appropriate for the type
of international transaction in which it is engaged, with reference to market returns achieved for
similar types of transactions by independent enterprises, and thereafter, the residual net profit


remaining after such allocation may be split amongst the enterprises in proportion to their relative
contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the
aggregate of the net profit allocated to the enterprise in the first instance together with the residual
net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be
the net profit arising to that enterprise from the international transaction.
Two step Approach of Profit Spilt Method
Step 1: Allocation of sufficient profit to each enterprise to provide a basic compensation for
routine contributions. This basic compensation does not include a return for possible valuable
intangible assets owned by the associated enterprises. The basic compensation is determined based
on the returns earned by comparable independent enterprises for comparable transactions or, more
frequently, functions.
Step 2: Allocation of residual profit (i.e. profit remaining after step 1) between the associated
enterprises based on the facts and circumstances. If the residual profit is attributable to intangible
property, then the allocation of this profit should be based on the relative value of each enterprise’s
contributions of intangible property.
Example on the Profit Split Method (Residual Analysis Approach)
Company A is an Indian Company and deals in telecommunication products. It has developed
a Microprocessor and it holds the patent for manufacturing of the microprocessor. Company B
which is an overseas subsidiary of Company A is engaged in manufacturing of Mobile equipment
at Australia. Company A supply the microprocessor to company B for using it in Mobile equipment
and company B in turn after manufacturing the mobile sends the mobile to company “A” in India.
Company A sells all the mobile in India.
Both companies contribute to the success of the mobile equipment through their design of the
microprocessor and the equipment. As the nature of the products is very advanced and unique, the
group is unable to locate any comparable with similar intangible assets. Therefore, neither the
traditional methods i.e. CUP Method, RSP Method nor the TNMM is appropriate in this case.
Nevertheless, the group is able to obtain reliable data on hand phone contract manufacturers
and equipment wholesalers without unique intangible property in the telecommunication industry.
The manufacturers earn a mark-up of 10% while the wholesalers derive a 25% margin on sales.
Company A’s and Company B’s respective share of profit is determined in 2 steps using the
profit split method (residual analysis approach).
Step 1 – Determining the basic return
The simplified accounts of Company A and Company B are shown below:
Company B Company A
(Rs. in Lakhs) (Rs. in Lakhs)
Sales 100 125
Cost of Goods Sold (60) (100)
Gross Margin 40 25
Sales, General & Administration
Expenses (5) (15)
Operating Margin 35 10


The total operating profit for the group is Rs. 45 Lakhs.
Company B
Particulars Amount (Rs. in Lakhs)
Cost of goods sold 60
Margin @10% 6
Transfer price based on Comparable
(without considering Intangibles) 66
Company A
Particulars Amount (Rs. in Lakhs)
Sales to third party customers 125
Resale margin of wholesalers
comparables (without intangibles)
@25% 31.25
Gross Margin 31.25
Company B Company A
Sales 66
Cost of Goods Sold (60)
Gross Margin 6 31.25
Sales, General & Admin
Expenses (5) (15)
Routine operating margin 1 16.25
The total operating margin of the group is Rs. 17.25 Lakhs.
Step 2 : Dividing the residual profit
The residual profit of the group is = Rs. 45 Lakhs - Rs. 17.25 Lakhs= Rs. 27.75 Lakhs
On further study of the two companies, two particular expense items, R&D expenses and
marketing expenses, are identified as the key intangibles critical to the success of the mobile
equipment. The R&D expenses and marketing expenses incurred by each company are:
Company A 12 Lakhs (80%)
Company B 3 Lakhs (20%)
Assuming that the R&D and marketing expenses are equally significant in contributing to the
residual profits, based on the proportionate expenses incurred:
Company A’s share of residual profit (80% x 27.75)
= Rs. 22.20 Lakhs


Company B’s share of residual profit (20% x 27.75)
= Rs. 5.55 Lakhs
Therefore, the adjusted operating profit of
Company A is = Rs. 22.20 L + Rs. 16.25 L = Rs. 38.45 Lakhs
Company B is = Rs. 5.55 + Rs. 1 = Rs. 6.55 Lakhs.
The adjusted tax accounts are as follows:
Company B Company A
Sales 71.55 125
Cost of Goods Sold (60) (71.55)
Gross Margin 11.55 53.45
Sales, General & Admin
Expenses (5) (15)
Operating Margin 6.55 38.45
Hence, the transfer price determined using the profit split method (residual analysis approach)
should be Rs. 71.55 Lakhs
(E) Transactional Net Margin Method (TNMM)
Rule 10B (1) (e) of Income Tax Rules, 1962 prescribes, Transactional net margin method, by
which,
(i) The net profit margin realized by the enterprise from an international transaction entered
into with an associated enterprise is computed in relation to costs incurred or sales effected
or assets employed or to be employed by the enterprise or having regard to any other
relevant base;
(ii) The net profit margin realized by the enterprise or by an unrelated enterprise from a
comparable uncontrolled transaction or a number of such transactions is computed having
regard to the same base;
(iii) The net profit margin referred to in (ii) arising in comparable uncontrolled transactions is
adjusted to take into account the differences, if any, between the international transaction
and the comparable uncontrolled transactions, or between the enterprises entering into such
transactions, which could materially affect the amount of net profit margin in the open
market;

(iv) the net profit margin realized by the enterprise and referred to in (i) is established to be the
same as the net profit margin referred to in (iii);

(v) The net profit margin thus established is then taken into account to arrive at an arms length
price in relation to the international transaction.
Example


Nikhil & Co is an India manufacturer of dishwashers. All Nikhil & Co’s dishwashers are sold to
an overseas associated enterprise, Company G, and bears Company G’s brand. Company G, a
household electrical appliances brand name, sells only dishwashers manufactured by Nikhil &
Co.

The CUP method is not applied in this case because no reliable adjustments can be made to
account for differences with similar products in the market. After the appropriate functional
analysis, Nikhil & Co was able to identify an Indian manufacturer of home electrical appliances,
Company H, as a suitable comparable company. However, Company H performs warranty
functions for its independent wholesalers, whereas Nikhil & Co does not. Company H realizes a
net mark up (i.e. operating margin) of 10%.

As the costs pertaining to the warranty functions cannot be separately identified in Company
H’s accounts and no reliable adjustments can be made to account for the difference in the
functions, it may be more reliable to examine the net margins in this case. The transfer price for
Nikhil & Co’s sale of dishwashers to Company G is computed using the TNMM as follows:
Nikhil & Co’s cost of goods sold Rs. 5,000
Nikhil & Co’s operating expenses Rs. 1,500
Total costs Rs. 6,500
Add : Net mark up @ 10% (10% x 6,500) Rs. 650
Transfer price based on TNMM Rs. 7,150
Selection of Transfer Pricing Method
Rule 10C of the Indian Income Tax Rules, 1962 states that:
In selecting a most appropriate method, the following factors shall be taken into account
namely,
(a) The nature and class of the international transaction.*
(b) The class or classes of Associated Enterprises entering into the transaction and the functions
performed by them taking into account assets employed or to be employed and risks
assumed by such enterprises.
(c) The availability, coverage and reliability of data necessary for application of the method.
(d) The degree of comparability existing between the international transaction and the
uncontrolled transaction and between the enterprises entering into such transactions.
(e) The extent to which reliable and accurate adjustments can be made to account for
differences, if any, between the international transaction and the comparable uncontrolled
transactions or between the enterprises entering into such transactions.
(f) The nature, extent and reliability of assumptions required to be made in the application of a
method.
The starting point to select the most appropriate method is the functional analysis which is
necessary regardless of what transfer pricing method is selected. Each method may require a
deeper analysis focusing on aspects relating to various methods. The functional analysis helps to:
• Identify and understand the intra-group transactions;


• Have a basis for comparability;
• Determine any necessary adjustments to the comparables;
• Check the accuracy of the method selected; and
• Over time, to consider adaptation of the policy if the functions, risks or assets have been
modified.
Functional analysis also forms part of the documentation. The major components of a functional
analysis are:

1. Identification of Functions Performed : for the purpose of determining comparability, functions
of the entities play an important role.
2. Identification of Risk Undertaken : A risk-bearing party should have a chance of higher
earnings than a non-risk bearing party, and will incur the expenses and perhaps related loss
if and when risk materializes.
3. Identification of Assets used or contributed : The functional analysis must identify and
distinguish tangible assets and intangible assets as this is very important for functional
analysis.
The functional analysis provides answers to identify which functions risks and assets are
attributable to the various related parties. In some cases one company may perform one function
but the cost thereof is incurred/ paid by the other party to the transaction. The functional analysis
could emphasize that situation. The functional analysis includes reference to the industry specifics,
the contractual terms of the transaction, the economics circumstances and the business strategies. A
checklist with columns for each related party and if needed for the comparable parties could be
used to summarize the functional analysis and give a quick idea of which party performs each
relevant function, uses what assets and bears which risk. But this short-cut overview should not be
used by tax auditors to count the number of enumerated functions, risks and assets in order to
determine the arm’s length compensation. It should be used to consider the relative importance of
each function, risk and asset. Once the functional analysis is performed and the functionality of the
entity as regards the transactions subject to review (or the entity as a whole) has been completed, it
can be determined what transfer pricing method is most suitable to determine the arm’s length
price for the transactions under the review (or the operating margin for the entity under review).
There is no universally accepted method or model which describes the technique for choosing a
transfer pricing method. Traditionally comparable Uncontrolled Pricing Method, Profit Split
Method, Resale Price Methods are being used in transfer pricing. Other method as TNMM may also
be used after the functional analysis and global practices analysis.
8. Reference to Transfer Pricing Officer
Section 92CA of Income Tax Act deals with Reference to Transfer Pricing Officer by assessing
officer.
It provides that Assessing Officer with prior approval of Commissioner may refer the
computation of Arm’s Length Price in an International Transaction* to transfer pricing officer if he
considers it necessary or expedient to do so. On reference by Assessing officer, Transfer Pricing
Officer (TPO) shall serve a notice to the Assessee requiring him to produce the evidence in support
of computation made by him of Arm’s Length Price in relation to an International transaction


Who is Transfer Pricing Officer (TPO)
For the purpose of Section 92CA “Transfer Pricing Officer” means a Joint Commissioner or
Deputy Commissioner or Assistant Commissioner authorized by the Board to perform all or any of
the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or
class of persons.
Determination of Arm’s Length Price by Transfer Pricing Officer
Transfer Pricing Officer after hearing the evidences, information or documents as produced by
assessee and after considering such evidence as he may require on any specified points and after
taking into account all relevant materials which he has gathered, shall, by order in writing,
determine the arm’s length price in relation to the international transaction/specified transaction
and send a copy of his order to the Assessing Officer and to the assessee. On receipt of the order
from Transfer Pricing officer, the Assessing Officer shall proceed to compute the total income of the
assessee in conformity with the arm’s length price as determined by the Transfer Pricing Officer.
Rectification of Arm’s Length Price Order by Transfer Pricing Officer
If any mistake is observed which is apparent from record, the Transfer Pricing Officer may
amend any order passed by him and the provisions of Section 154 w.r.t. rectification of mistake
shall apply accordingly. Where any amendment is made by the Transfer Pricing Officer, he shall
send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of
assessment in conformity with such order of the Transfer Pricing Officer.
Powers of Transfer Pricing Officer
1. Power to call evidences/Information from Assessee
As per Section 92CA(2), the Transfer Pricing Officer may issue a notice to the Assessee and
ask him to furnish records, evidences, information in support of the computation of Arm’s
Length Price relating to the International Transaction.
2. Power to amend the Order made in regard to computation of Arm length price for the transaction
refereed to him
As stated earlier, if any mistake is observed which is apparent from record, the Transfer
Pricing Officer may amend any order passed by him and the provisions of section 154 w.r.t.
rectification of mistake shall apply accordingly
3. Power to proceed into the cases not referred to him
As per amendment made by Finance Act, 2011 the jurisdiction of the Transfer Pricing
Officer shall extend to the determination of the Arm’s Length Price ( ALP) in respect of
other international transactions* which are noticed by him subsequently, in the course of
proceedings before him. These international transactions would be in addition to the
international transactions referred to the TPO by the Assessing Officer
4. Power to exercise all of the following powers specified in Sections 131(1) (a) to 131(1) (d) or 133(6) or
133A of Income Tax Act:
Power u/s 131(1) (a) to 131(1) (d)


TPO have the same powers as are vested in a Court under the Code of Civil Procedure, 1908
(5 of 1908), when trying a suit in respect of the following matters, namely:—
(a) discovery and inspection;
(b) enforcing the attendance of any person, including any officer of a banking company and
examining him on oath;
(c) compelling the production of books of account and other documents; and
(d) Issuing commissions.
Power u/s 133(6)
Under Section 133(6), TPO may require any person, including a banking company or any officer
thereof, to furnish information in relation to such points or matters, or to furnish statements of
accounts and affairs verified in the manner specified by him giving information in relation to
such points or matters as his opinion will be useful for, or relevant to, any enquiry or
proceeding under this Act.
Power u/s 133A - Power of Survey
Finance Act, 2011 has made an amendment which provides for the power of Survey to TPO
through introduction of Section 133A. In course of the proceedings, a TPO may carry out the
survey as per section 133A of Income Tax Act.
9. Transfer Pricing – Documentation
The legal framework for maintenance of information and documentation by a taxpayer is
provided in Section 92D of Income Tax Act, 1961 which lays down that every person who enters
into an international transaction* with an associated enterprise shall maintain prescribed
information and documents. The various types of information and documents to be maintained in
respect of an international transaction, the associated enterprise and the transfer pricing method
used are prescribed in Rule 10D of the Income Tax Rules, as under:
(a) A description of the ownership structure of the enterprise and details of shares or other
ownership interest held therein by other enterprises;

(b) A profile of the multinational group of which the assessee enterprises i.e. taxpayer is a part
and the name, address, legal status and country of tax residence of each of the enterprises
comprised in the group with whom international transactions have been made by the
taxpayer and the ownership linkages among them;

(c) A broad description of the business of the taxpayer and the industry in which it operates
and the business of the associated enterprises;

(d) The nature, terms and prices of international transaction entered into with each associated
enterprise, details of property transferred or services provided and the quantum and the
value of each such transaction or class of such transaction;

(e) A description of the functions performed, risks assumed and assets employed or to be
employed by the taxpayer and by the associated enterprise involved in the international
transaction;


(f) A record of the economic and market analysis, forecasts, budgets or any other financial
estimates prepared by the taxpayer for its business as a whole or separately for each
division or product which may have a bearing on the international transaction entered into
by the taxpayer;
(g) A record of uncontrolled transactions taken into account for analysing their comparability
with the international transaction entered into, including a record of the nature, terms and
conditions relating to any uncontrolled transaction with third parties which may be relevant
to the pricing of the international transactions;
(h) A record of the analysis performed to evaluate comparability of uncontrolled transactions
with the relevant international transaction*;
(i) A description of the methods considered for determining the arm's length price in relation
to each international transaction or class of transaction, the method selected as the most
appropriate method along with explanations as to why such method was so selected, and
how such method was applied in each case;

(j) A record of the actual working carried out for determining the arm's length price, including
details of the comparable data and financial information used in applying the most
appropriate method and adjustments, if any, which were made to account for differences
between the international transaction and the comparable uncontrolled transactions or
between the enterprises entering into such transaction;

(k) The assumptions, policies and price negotiations if any which have critically affected the
determination of the arm's length price;

(l) Details of the adjustments, if any made to the transfer price to align it with arm's length
price determined under these rules and consequent adjustment made to the total income for
tax purposes;

(m) Any other information, data or document, including information or data relating to the
associated enterprise, which may be relevant for determination of the arm's length price.
Rule 10D also prescribes that the above information is to be supported by authentic documents
which may include the following:
(a) Official publications, reports, studies and data bases of the government of the country of
residence of the associated enterprise or of any other country;
(b) Reports of market research studies carried out and technical publications of institutions of
national or international repute;
(c) Publications relating to prices including stock exchange and commodity market quotations;
(d) Published accounts and financial statements relating to the business of the associated
enterprises;
(e) Agreements and contracts entered into with associated enterprises or with unrelated
enterprises in respect of transaction similar to the international transactions;
(f) Letters and other correspondence documenting terms negotiated between the taxpayer and
associated enterprise;


(g) Documents normally issued in connection with various transaction under the accounting
practices followed.
Burden or Proof

It is noteworthy that the information and documentation requirements referred to above are
linked to the burden of proof laid on the taxpayer to prove that the transfer price adopted is in
accordance with the arm's length principle. One of the conditions to be fulfilled for discharging this
burden by the taxpayer is maintenance of prescribed information and documents in respect of an
international transaction entered into with a associated enterprise. A default in maintaining
information and documents in accordance with the rules is one of the conditions which may trigger
a transfer pricing audit under Section 92C(3). Any default in respect of the documentation
requirement may also attract penalty of a sum equal to two percent of the value of the international
transaction (Sec 271AA).
Submission of Documents with the Tax Authorities

There is no reference in the provisions included either in the Income Tax Act or the Income Tax
Rules about any requirement to submit the prescribed information and documents at the stage of
initial compliance in the form of submission of report under Section 92E. All that Section 92E
requires is that the concerned taxpayer shall obtain a Report from an Accountant in the prescribed
form (Form 3CEB) and submit the Report by the specified date.
Form 3CEB contains a certificate from the Accountant that in his opinion proper information
and documents as prescribed have been maintained by the taxpayer. Rule 10D requires that the
information and document maintained should be contemporaneous as far as possible and should
exist latest by the specified date for filing the report under Section 92E. Section 92D also provides
that information and documentation may be requisitioned by the Assessing Officer or the Appellate
Commissioner on a notice of thirty days which period may be extended by another period of 30
days.
Non Applicability of Documentation Requirement
Although the law has prescribed no monetary limit in respect of international transaction
covered by the transfer pricing requirements, an exception is provided in para 2 of Rule 10D in
respect of the maintenance of information and document requirement in respect of international
transactions not exceeding Rs. 100 Lakhs . It is provided that the above requirement will not apply
to such transactions. However, the concerned taxpayer may be required to substantiate on the basis
of available material that the income arising from the international transaction is computed in
accordance with the arm's length rule.
Retention Period of Documents kept under Rule 10D
The prescribed information and documents are required to be maintained for a period of six
years from the end of the relevant Assessment years thus the information and documents are
required to be maintained for a period of eight years. Rule 10D absolves a taxpayer entering into an
international transaction which continues to have effect over more than one year from maintaining
separate set of documents for each year. However separate documents are required for each year if
there is any significant change in the terms and conditions of the international transaction which
have a bearing on the transfer price.


10. Transfer Pricing – Penalty for Contravention
Contravention of Transfer Pricing provisions as contained in Chapter X of the Income tax Act,
1961 may invite hefty penalties. The details of penalties under different sections of Income tax Act,
1961 are as follows:-
A. Penalty for concealment of income or for furnishing inaccurate particulars of such income
under Section 271(1)(c)
If the Assessing Officer or Commissioner (Appeals) or the Commissioner in the course of any
proceedings under this Act, is satisfied that any person has concealed the particulars of his
income or furnished inaccurate particulars of such income, he may direct that such person shall
pay by way of penalty in addition to tax, if any, payable by him, a sum which shall not be less
than, but which shall not exceed three times, the amount of tax sought to be evaded by reason
of the concealment of particulars of his income or the furnishing of inaccurate particulars of
such income.
Explanation 7 to Section 271(1)(c) - Where in the case of an assessee who has entered into an
international transaction defined in section 92B, any amount is added or disallowed in
computing the total income under sub-section (4) of section 92C, then, the amount so added or
disallowed shall, for the purposes of clause (c) of this sub-section, be deemed to represent the
income in respect of which particulars have been concealed or inaccurate particulars have been
furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the
Commissioner (Appeals) or the Commissioner that the price charged or paid in such transaction
was computed in accordance with the provisions contained in section 92C and in the manner
prescribed under that Section, in good faith and with due diligence.
B. Penalty for failure to furnish information or document - Section 271G
As per Section 271G of Income Tax Act, If any person who has entered into an international
transaction fails to furnish any such information or document as required by sub-section (3) of
section 92D, the Assessing Officer or the Commissioner (Appeals) may direct that such person
shall pay, by way of penalty, a sum equal to two per cent of the value of the international
transaction for each such failure.
C. Penalty for failure to keep and maintain information and document in respect of
International transaction - Section 271AA
Without prejudice to the provisions of Section 271 or Section 271BA, if any person in
respect of an International transaction Fails to keep and maintain any such information and
document as required by sub-section (1) or sub-section (2) of Section 92D,
The Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by
way of penalty, a sum equal to two per cent of the value of each international transaction
entered into by such person.
D. Penalty for failure to furnish report under Section 92E– Section 271BA
If any person fails to furnish a report from an accountant as required by Section 92E, the
Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one
hundred thousand rupees.


E. Penalty for failure to answer questions, sign statements, furnish information, returns or
statements etc. - Section 272A
If any person,—
(a) being legally bound to state the truth of any matter touching the subject of his
assessment, refuses to answer any question put to him by an income-tax authority in the
exercise of its powers under this Act; or
(b) refuses to sign any statement made by him in the course of any proceedings under this
Act, which an income-tax authority may legally require him to sign; or
(c) to whom a summons is issued under sub-section (1) of Section 131 either to attend to
give evidence or produce books of account or other documents at a certain place and
time omits to attend or produce books of account or documents at the place or time, he
shall pay, by way of penalty, a sum of ten thousand rupees for each such default or
failure.


INDIRECT TAXES

(A) SERVICE TAX

Study XI and XII may be substituted with the following:
STUDY XI
SERVICE TAX – BACKGROUND, ADMINISTRATIVE
AND PROCEDURAL ASPECTS

The Service Tax was introduced on the recommendation of Dr. Raja Chelliah Committee on tax
reforms. Initially it was imposed at a uniform rate of 5% in the Union Budget for 1994-95 on 3
services. In a journey of about 17 years, it has seen various changes. Finance Act, 2012 has
Changing Service Tax on all services except on services mentioned made remarkable changes in
Service Tax legislation whereby changing services on the basis of Positive list of Taxable
services has been replaced with a negative list. Now all services except as notified in Negative
list or exemption list are subject to applicability of service tax.
LEARNING OBJECTIVES
At the end of this chapter, the students will acquire the knowledge and practical applicability of
the following under service tax regime.
• Background
• Constitutional Validity
• Limbs of Service Tax Laws
• Administrative Mechanism
• Taxability of Services : Negative List of Services
• Some Important Definitions under Finance Act,1994
• Rate of Service Tax
• Computation of Tax

11.1 Background
As the economy grows and develops, the contribution of the services sector becomes more
substantial. Hence, tax on services becomes substantial revenue for the Government.
Although Service Tax is a concept of the modern era where developed economies as well as
developing economies find over 70% of their gross economic output coming from the
service sector. Service Tax was there in vogue even in the Mauryan period in India. Ms.
Romila Thaper in her “Asoka and the Decline of the Mauryas”, at page 72 (London 196,
paperback edition, 1997, by Oxford) points out that services of weapon and implement
makers were required to be provided to the state for a certain number of days in a year. This
was a form of service tax in that period. But in the modern context, because of the increasing
contribution of the service sector to the GDP of an economy, the importance of service tax is
growing. As under the WTO agreements governments are required to reduce customs
tariffs, governments are considering increase in service taxes revenues as a compensatory
revenue generation mechanism. In terms of economics, tax on services is an indirect tax.


This is because the burden of service tax can be passed on to the customer i.e., the recipient
of the service. The service provider may also bear the burden of the tax by not charging the
service tax separately in the invoice.
The Tax Reforms Committee headed by Dr. Raja J Chelliah recognized the revenue potential
of the service sector and recommended imposition of service tax on selected services.
Consequently the service tax was imposed at a uniform rate of 5% in the Union Budget for
1994-95 on 3 services. Finance Act, 2012 has made remarkable changes in service tax
legislation whereby the concept of Positive list of Taxable Services has been replaced with a
negative list. A negative list of services implies two things; firstly, a list of services which are
not be subject to service tax; secondly, other than services mentioned in the negative list or
exempted list, all other services became taxable which fall within the definition of services.
This is in contrast to the present method of taxation that has detailed description for each
taxable service and all other unspecified services are not liable to tax.
11.2 Constitutional Validity
As per article 246 of the constitution of India law can be enacted by parliament or the state
legislature, if such power is given by the constitution of India.
Article 265 of the Constitution lays down that no tax shall be levied or collected except by the
authority of law. Schedule VII divides this subject into three categories—
(a) Union list (only Central Government has power of legislation)
(b) State list (only State Government has power of legislation)
(c) Concurrent list (both Central and State Government can pass legislation).

Entry 97 of the union list is the residuary entry and empowers the cenrtral government to
levy tax on any matter not enumerated in state list or the concurrent list.
In 1994, the service tax was levied by the central government under the power granted by
the entry 97 of the union list.
Thereafter in 2003 the government has passed the constitution (88th Amendment Act, 2003)
which provides for the levy of service tax by the centre through the insertion of article 268A
to the constitution. In addition to article 268A, entry 92C has been inserted in the union list
to make the enactment relating to service tax a subject matter of union list.
Students may note that entry No.92C has not yet been made effective by the parliament and
service tax is still governed by the entry 97 of the union list.

Test Your Knowledge
When service tax was first introduced in the year 1994, it was levied on a uniform basis.
• True
• False
Correct Answer: True
In the year 1994, when service tax was first introduced, it was first levied on a
uniform basis at the rate of 5% of the value of taxable services.


11.3 Limbs of Service Tax Laws
Certain provisions of the Central Excise Act, 1944 also apply to Service Tax. The various
limbs of the Service Tax Law are:
1. The provisions of the Finance Act, 1994 as amended by successive Finance Acts;
2. Service Tax Rules, 1994, as amended from time to time;
3. Service Tax (Advance Ruling), Rules 2003;
4. The CENVAT Credit Rules, 2004;
5. Authority for Advance Rulings (Central Excise, Customs and service tax) procedure
Regulations, 2005;
6. Service Tax (Registration of Special category of persons) Rules, 2005;
7. Service Tax (Determination of Value) Rules, 2006;
8. Service Tax (Provisional Attachment of Property) Rules, 2008;
9. Service Tax(Publication of Names) Rules, 2008;
10. Service Tax Return Preparer Scheme, 2009;
11. Point of Taxation Rules, 2011;
12. Indirect Tax Ombudsman Guidelines, 2011;
13. Service Tax (Settlement of Cases) Rules, 2012;
14. Service Tax (Compounding of Offences) Rules, 2012;
15. Service Tax (Removal of Difficulty) Order, 2012;
16. Place of Provision of services Rules, 2012.
Further, the provisions of services tax are also amended by Notifications by the
Government; Circulars on service tax issued by the CBEC; and Trade Notices issued by
jurisdictional Commissionerates of Central Excise on service tax matters;
11.4 Administrative Mechanism
Service tax being an indirect tax is being administered by the Central Board of Excise and
Customs (CBEC) which is under the control of the department of revenue, ministry of
finance. CBEC administers the service tax through the central excise department. A separate
cell called the service tax cell, under each commissionrate of central excise has been created
for the purpose.
11.5 Taxability of Service Tax
Service Tax is levied vide Finance Act, 1994. The Finance Act, 1994 applies all over India
except the state of Jammu & Kashmir.
Service tax is levied on taxable services. The levy of service tax dealt in section 66 (charging
section), which provides that service tax is levied at a specific rate on the value of taxable
services referred to in section 65(105) of the Act. However, with the insertion of a proviso in
section 66, the provisions of this section will cease to apply with effect from July 1, 2012.


Moreover, with effect from 1st July 2012, a new charging Section 66B has been inserted by
the Finance Act 2012. Section 66B provides that there shall be levied a service tax at the rate
of twelve per cent on the value of all services, except the services specified in the negative
list, provided or agreed to be provided in the taxable territory by a person to another and
collected in the prescribed manner.
“Service” means any activity, carried out by a person for another for consideration and
includes a declared service but shall not include
(a) any activity that constitutes merely
(i) a transfer of title of goods or immovable property by way of sale, gift or in any other
manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale, within
the meaning of clause (29A) of article 366 of the Constitution; or
(iii) a transaction only in money or actionable claim.
(b) any service provided by an employee to an employer in the course of the employment.
(c) fees payable to a court or a tribunal set up under a law for the time being in force.
However, these provisions shall not apply to
(A) the functions performed by the Members of Parliament, Members of State Legislative,
Members of Panchayats, Members of Municipalities and Members of other local
authorities who receive any consideration in performing the functions of that office as
such member; or
(B) the duties performed by any person who holds any post in pursuance of the provisions
of the Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a Member or a Director in a
body established by the Central Government or State Governments or local authority
and who is not deemed as an employee before the commencement of this section.
For the purposes of this clause, transaction in money shall not include any activity relating
to the use of money or its conversion by cash or by any other mode, from one form,
currency or denomination, to another form, currency or denomination for which a separate
consideration is charged.
For the purposes of this Chapter,—
(a) an unincorporated association or a body of persons, as the case may be, and a member
thereof shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any of his other establishment
in a non-taxable territory shall be treated as establishments of distinct persons.
A person carrying on a business through a branch or agency or representational office in
any territory shall be treated as having an establishment in that territory.
For clear understanding of the new service tax regime the understanding of negative list,
declared services, Mega exemptions and place of provision of supply rules is required.


11.5 (a) Declared Services
Section 66E has been newly inserted which specify that the nine specific activities or
transactions are declared to be covered as ‘service’. Such activities includes:–
(a) renting of immovable property
(b) construction of a complex.*
(c) temporary transfer or permitting the use or enjoyment of any intellectual property
right
(d) development, design, programming, customisation, adaptation, upgradation,
enhancement, implementation of information technology software
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or
to do an act
(f) transfer of goods by way of hiring, leasing, licensing or in any such manner without
transfer of right to use such goods
(g) activities in relation to delivery of goods on hire purchase or any system of payment
by instalments
(h) service portion in the execution of a works contract
(i) service portion in an activity wherein goods, being food or any other article of
human consumption or any drink (whether or not intoxicating) is supplied in any
manner as a part of the activity
11.5 (b) Negative List of Services
A Negative List approach to taxation of services has been introduced vide new sections,
namely, 66B, 66C, 66D, 66E and 66F in Chapter V of the Finance Act. The services
specified in the ‘Negative List’ (section 66D) will remain outside the tax net. All other
services, except those specifically exempted by the exercise of powers under section
93(1) of the Finance Act, 1994, would thus be chargeable to service tax. Negative list
approach to taxation of services is effective from July 1, 2012.

Section 66D has been newly inserted which specify the following list of services under
the negative list: –

(a) services by Government or a local authority excluding the following services to the
extent they are not covered elsewhere –

(i) services by the Department of Posts by way of speed post, express parcel post,
life insurance and agency services provided to a person other than Government.

(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a
port or an airport.
(iii) transport of goods or passengers.
(iv) support services, other than services covered under clauses (i) to (iii) above,
provided to business entities.


(b) services by the Reserve Bank of India.
(c) services by a foreign diplomatic mission located in India.
(d) services relating to agriculture or agricultural produce by way of—
(i) agricultural operations directly related to production of any agricultural produce
including cultivation, harvesting, threshing, plant protection or seed testing.
(ii) supply of farm labour.
(iii) processes carried out at an agricultural farm including tending, pruning, cutting,
harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting,
grading, cooling or bulk packaging and such like operations which do not alter
the essential characteristics of agricultural produce but make it only marketable
for the primary market.
(iv) renting or leasing of agro machinery or vacant land with or without a structure
incidental to its use.
(v) loading, unloading, packing, storage or warehousing of agricultural produce.
(vi) agricultural extension services.
(vii) services by any Agricultural Produce Marketing Committee or Board or services
provided by a commission agent for sale or purchase of agricultural produce.
(e) trading of goods.
(f) any process amounting to manufacture or production of goods.
(g) selling of space or time slots for advertisements other than advertisements broadcast
by radio or television.
(h) service by way of access to a road or a bridge on payment of toll charges.
(i) betting, gambling or lottery.
(j) admission to entertainment events or access to amusement facilities.
(k) transmission or distribution of electricity by an electricity transmission or
distribution utility.
(l) services by way of –
(i) pre-school education and education up to higher secondary school or equivalent.
(ii) education as a part of a curriculum for obtaining a qualification recognised by
any law for the time being in force.
(iii) education as a part of an approved vocational education course.
(m) services by way of renting of residential dwelling for use as residence.
(n) services by way of –
(i) extending deposits, loans or advances in so far as the consideration is
represented by way of interest or discount ;


(ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers
of foreign exchange or amongst banks and such dealers.
(o) service of transportation of passengers, with or without accompanied belongings, by
(i) a stage carriage
(ii) railways in a class other than –
(A) first class or
(B) an airconditioned coach
(iii) metro, monorail or tramway
(iv) inland waterways
(v) public transport, other than predominantly for tourism purpose, in a vessel
between places located in India and
(vi) metered cabs, radio taxis or auto rickshaws
(p) services by way of transportation of goods—
(i) by road except the services of—
(A) a goods transportation agency; or
(B) a courier agency
(ii) by an aircraft or a vessel from a place outside India up to the customs station of
clearance in India or
(iii) by inland waterways
(q) funeral, burial, crematorium or mortuary services including transportation of the
deceased.
11.5 (c) List of Exemptions under Mega Notification
The Central Governments vide its notification No 25/2012 has exempts the following
taxable services from the whole of the service tax leviable thereon under section 66B of
the said Act, namely:-
1. Services provided to the United Nations or a specified international organization.
2. Health care services by a clinical establishment, an authorized medical practitioner
or para-medics.
3. Services by a veterinary clinic in relation to health care of animals or birds.
4. Services by an entity registered under section 12AA of the Income tax Act, 1961 (43
of 1961) by way of charitable activities.
5. Services by a person by way of-
(a) renting of precincts of a religious place meant for general public; or
(b) conduct of any religious ceremony.
6. Services provided by-
a. an arbitral tribunal to -
i. any person other than a business entity; or


ii. a business entity with a turnover up to rupees ten lakh in the preceding
financial year.
b. an individual as an advocate or a partnership firm of advocates by way of legal
services to,-
(i) an advocate or partnership firm of advocates providing legal services ;
(ii) any person other than a business entity; or
(iii) a business entity with a turnover up to rupees ten lakh in the preceding
financial year; or
c. a person represented on an arbitral tribunal to an arbitral tribunal.
7. Services by way of technical testing or analysis of newly developed drugs, including
vaccines and herbal remedies, on human participants by a clinical research
organisation approved to conduct clinical trials by the Drug Controller General of
India.
8. Services by way of training or coaching in recreational activities relating to arts,
culture or sports.
9. Services provided to or by an educational institution in respect of education
exempted from service tax, by way of,-
(a) auxiliary educational services; or
(b) renting of immovable property.
10. Services provided to a recognised sports body by-
(a) an individual as a player, referee, umpire, coach or team manager for
participation in a sporting event organized by a recognized sports body;
(b) another recognised sports body.
11. Services by way of sponsorship of sporting events organised,-
(a) by a national sports federation, or its affiliated federations, where the
participating teams or individuals represent any district, state or zone;
(b) by Association of Indian Universities, Inter-University Sports Board, School
Games Federation of India, All India Sports Council for the Deaf, Paralympic
Committee of India or Special Olympics Bharat;
(c) by Central Civil Services Cultural and Sports Board;
(d) as part of national games, by Indian Olympic Association; or
(e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme.
12. Services provided to the Government, a local authority or a governmental authority
by way of construction, erection, commissioning, installation, completion, fitting out,
repair, maintenance, renovation, or alteration of-
(a) a civil structure or any other original works meant predominantly for use other
than for commerce, industry, or any other business or profession;


(b) a historical monument, archaeological site or remains of national importance,
archaeological excavation, or antiquity specified under the Ancient Monuments
and Archaeological Sites and Remains Act, 1958 (24 of 1958);
(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or
(iii) an art or cultural establishment;
(d) canal, dam or other irrigation works;
(e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii)
sewerage treatment or disposal; or
(f) a residential complex predominantly meant for self-use or the use of their
employees or other persons specified in the Explanation 1 to clause 44 of section
65 B of the said Act.
13. Services provided by way of construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance, renovation, or alteration of,-
(a) a road, bridge, tunnel, or terminal for road transportation for use by general
public;
(b) a civil structure or any other original works pertaining to a scheme under
Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
(c) a building owned by an entity registered under section 12 AA of the Income tax
Act, 1961(43 of 1961) and meant predominantly for religious use by general
public;
(d) a pollution control or effluent treatment plant, except located as a part of a
factory; or
(e) a structure meant for funeral, burial or cremation of deceased.
14. Services by way of construction, erection, commissioning, or installation of original
works pertaining to,-
(a) an airport, port or railways, including monorail or metro;
(b) a single residential unit otherwise than as a part of a residential complex;
(c) low- cost houses up to a carpet area of 60 square metres per house in a housing
project approved by competent authority empowered under the ‘Scheme of
Affordable Housing in Partnership’ framed by the Ministry of Housing and
Urban Poverty Alleviation, Government of India;
(d) post- harvest storage infrastructure for agricultural produce including a cold
storages for such purposes; or
(e) mechanised food grain handling system, machinery or equipment for units
processing agricultural produce as food stuff excluding alcoholic beverages.
15. Temporary transfer or permitting the use or enjoyment of a copyright covered under
clauses (a) or (b) of sub-section (1) of section 13 of the Indian Copyright Act, 1957 (14


of 1957), relating to original literary, dramatic, musical, artistic works or
cinematograph films.
16. Services by a performing artist in folk or classical art forms of (i) music, or (ii) dance,
or (iii) theatre, excluding services provided by such artist as a brand ambassador.
17. Services by way of collecting or providing news by an independent journalist, Press
Trust of India or United News of India.
18. Services by way of renting of a hotel, inn, guest house, club, campsite or other
commercial places meant for residential or lodging purposes, having declared tariff
of a unit of accommodation below rupees one thousand per day or equivalent.
19. Services provided in relation to serving of food or beverages by a restaurant, eating
joint or a mess, other than those having (i) the facility of air-conditioning or central
air-heating in any part of the establishment, at any time during the year, and (ii) a
licence to serve alcoholic beverages.
20. Services by way of transportation by rail or a vessel from one place in India to
another of the following goods -
(a) petroleum and petroleum products falling under Chapter heading 2710 and
2711 of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);
(b) relief materials meant for victims of natural or man-made disasters, calamities,
accidents or mishap;
(c) defence or military equipments;
(d) postal mail or mail bags;
(e) household effects;
(f) newspaper or magazines registered with the Registrar of Newspapers;
(g) railway equipments or materials;
(h) agricultural produce;
(i) foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and
edible oil, excluding alcoholic beverages; or
(j) chemical fertilizer and oilcakes.
21. Services provided by a goods transport agency by way of transportation of -
(a) fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage;
(b) goods where gross amount charged for the transportation of goods on a
consignment transported in a single goods carriage does not exceed one
thousand five hundred rupees; or
(c) goods, where gross amount charged for transportation of all such goods for a
single consignee in the goods carriage does not exceed rupees seven hundred
fifty.
22. Services by way of giving on hire -


(a) to a state transport undertaking, a motor vehicle meant to carry more than
twelve passengers; or
(b) to a goods transport agency, a means of transportation of goods.
23. Transport of passengers, with or without accompanied belongings, by -
(a) air, embarking from or terminating in an airport located in the state of Arunachal
Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura
or at Bagdogra located in West Bengal;
(b) a contract carriage for the transportation of passengers, excluding tourism,
conducted tour, charter or hire; or
(c) ropeway, cable car or aerial tramway.
24. Services by way of vehicle parking to general public excluding leasing of space to an
entity for providing such parking facility.
25. Services provided to Government, a local authority or a governmental authority by
way of -
(a) carrying out any activity in relation to any function ordinarily entrusted to a
municipality in relation to water supply, public health, sanitation conservancy,
solid waste management or slum improvement and upgradation; or
(b) repair or maintenance of a vessel or an aircraft.
26. Services of general insurance business provided under following schemes-
(a) Hut Insurance Scheme;
(b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojna (earlier known as
Integrated Rural Development Programme);
(c) Scheme for Insurance of Tribals;
(d) Janata Personal Accident Policy and Gramin Accident Policy;
(e) Group Personal Accident Policy for Self-Employed Women;
(f) Agricultural Pumpset and Failed Well Insurance;
(g) premia collected on export credit insurance;
(h) Weather Based Crop Insurance Scheme or the Modified National Agricultural
Insurance Scheme, approved by the Government of India and implemented by
the Ministry of Agriculture;
(i) Jan Arogya Bima Policy;
(j) National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana);
(k) Pilot Scheme on Seed Crop Insurance;
(l) Central Sector Scheme on Cattle Insurance;
(m) Universal Health Insurance Scheme;


(n) Rashtriya Swasthya Bima Yojana; or
(o) Coconut Palm Insurance Scheme.
27. Services provided by an incubatee up to a total turnover of fifty lakh rupees in a
financial year subject to the following conditions, namely:-
(a) the total turnover had not exceeded fifty lakh rupees during the preceding
financial year; and
(b) a period of three years has not been elapsed from the date of entering into an
agreement as an incubatee.
28. Service by an unincorporated body or a non- profit entity registered under any law
for the time being in force, to its own members by way of reimbursement of charges
or share of contribution -
(a) as a trade union;
(b) for the provision of carrying out any activity which is exempt from the levy of
service tax; or
(c) up to an amount of five thousand rupees per month per member for sourcing of
goods or services from a third person for the common use of its members in a
housing society or a residential complex;
29. Services by the following persons in respective capacities -
(a) sub-broker or an authorised person to a stock broker;
(b) authorised person to a member of a commodity exchange;
(c) mutual fund agent to a mutual fund or asset management company;
(d) distributor to a mutual fund or asset management company;
(e) selling or marketing agent of lottery tickets to a distributer or a selling agent;
(f) selling agent or a distributer of SIM cards or recharge coupon vouchers;
(g) business facilitator or a business correspondent to a banking company or an
insurance company, in a rural area; or
(h) sub-contractor providing services by way of works contract to another contractor
providing works contract services which are exempt;
30. Carrying out an intermediate production process as job work in relation to -
(a) agriculture, printing or textile processing;
(b) cut and polished diamonds and gemstones; or plain and studded jewellery of
gold and other precious metals, falling under Chapter 71 of the Central Excise
Tariff Act ,1985 (5 of 1986);
(c) any goods on which appropriate duty is payable by the principal manufacturer;
or


(d) processes of electroplating, zinc plating, anodizing, heat treatment, powder
coating, painting including spray painting or auto black, during the course of
manufacture of parts of cycles or sewing machines upto an aggregate value of
taxable service of the specified processes of one hundred and fifty lakh rupees in
a financial year subject to the condition that such aggregate value had not
exceeded one hundred and fifty lakh rupees during the preceding financial year;

31. Services by an organiser to any person in respect of a business exhibition held
outside India;

32. Services by way of making telephone calls from -

(a) departmentally run public telephone;

(b) guaranteed public telephone operating only for local calls; or
(c) free telephone at airport and hospital where no bills are being issued.
33. Services by way of slaughtering of bovine animals.
34. Services received from a provider of service located in a non- taxable territory by -
(a) Government, a local authority, a governmental authority or an individual in
relation to any purpose other than commerce, industry or any other business or
profession;
(b) an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961)
for the purposes of providing charitable activities; or
(c) a person located in a non-taxable territory.
35. Services of public libraries by way of lending of books, publications or any other
knowledge- enhancing content or material.
36. Services by Employees’ State Insurance Corporation to persons governed under
the Employees’ Insurance Act, 1948 (34 of 1948).
37. Services by way of transfer of a going concern, as a whole or an independent part
thereof.
38. Services by way of public conveniences such as provision of facilities of bathroom,
washrooms, lavatories, urinal or toilets.
39. Services by a governmental authority by way of any activity in relation to any
function entrusted to a municipality under article 243W of the Constitution.
Test Your Knowledge
Service Tax is applicable on Selected services as notified in Finance act,1994
• True
• False
Correct Answer : False


Vide Finance Act, 2012 service tax is applicable on all services except as notified in
Negative list or exemption list.
11.5 (d) Place of Provision of Services Rules
The charging section 66B specifies that service tax is leviable on services not mentioned
in the negative list and provided in taxable territory. The words “provided or agreed to
be provided in “taxable territory” makes it important to identify the jurisdiction of
where the service is provided.
For this purpose, the Central Government authorized to notify the place of provision of
service therefore, Place of Provision of Supply Rules, 2012 are formulated, which
determines the place where the services are provided or deemed to be provided. Its
taxability will be determined based on the location of its provision. The “Place of
Provision of Services Rules, 2012’ has replaced the ‘Export of Services Rules, 2005 and
Taxation of Services (Provided from outside India and received in India) Rules, 2006.
These rules are primarily meant for persons who deal in cross border services. They will
also be equally applicable for those who have operations with suppliers or customers in
the state of Jammu and Kashmir.
Additionally service providers operating within India from multiple locations, without
having centralized registration will find them useful in determining the precise taxable
jurisdiction applicable to their operations. The rules will be equally relevant for
determining services that are wholly consumed within a SEZ to avail the outright
exemption.
These rules provide a backdrop in the eventual roll out of a nation-wide GST ans other
related issues that may arise in the taxation of inter-state services.
What is Taxable Territory ?
Taxable territory has been defined in sub-section 52 of section 65B. It means the territory to
which the provisions of Chapter V of the Finance Act, 1994 apply i.e. whole of India
excluding the state of Jammu and Kashmir.
Place of provision
As per the Place of Provisions of Service Rules, 2012 place of provision of a service shall be
the location of the receipent of service. However, in case the location of the service receiver
is not available in the ordinary course of buiseness, the place of provision shall be the
location of the provider of service.
Significance of Location of service provider and service receiver
Service tax is required to be paid by the provider of a service, except where he is located
outside the taxable territory and the place of provision of service is in the taxable territory.
Where the provider of a service is located outside the taxable territory, the person liable to
pay service tax is the receiver of the service in the taxable territory, unless of course, the
service is otherwise exempted. Therefore, the identification of location of service provider
and service receiver is very much essential.
The location of a service provider or receiver (as the case may be) is to be determined by
applying the following steps sequentially:


A. where the service provider or receiver has obtained only one registration, whether
centralized or otherwise, the premises for which such registration has been obtained;
B. where the service provider or receiver is not covered by A above:
i. the location of his business establishment; or
ii. where services are provided or received at a place other than the business
establishment i.e. a fixed establishment elsewhere, the location of such
establishment;
iii/ where services are provided or received at more than one establishment, whether
business or fixed, the establishment most directly concerned with the provision or
use of the service; and
iv. in the absence of such places, the usual place of residence of the service provider or
receiver.
Steps to determine the Taxability of service under Negative List Regime
1. Check whether the activity falls within the definition of service and declared services.
2. if it is service then, check whether the service provided is excluded either by the negative
list or is otherwise exempted.
3. If it is so covered, then check out the applicability of place of provision of services rules.

11.6 Computation of Service Tax
Rate of Service Tax
The rate of service tax is itself mentioned in the charging section. As per the new charging
section 66B service tax is leviable @12% on the value of all services. Further, education cess
of 2% plus secondary and higher education cess of 1% is levied.
Computation of Tax
If a person renders a taxable service of the value of ` 500, the service tax @12% will be ` 60.
The education cess and Secondary & Higher education cess @3% on ` 60 will be ` 1.80. The
total tax will be ` 61.80.
Value of Taxable Services
Where the gross amount charged by a service provider is inclusive of service tax payable,
the value of taxable service shall be such amount as with the addition of tax payable, is
equal to the gross amount charged. Service tax is levied on services provided within the
territory of India including territorial waters of India extending upto 12 nautical miles
(under International Sea Act). And hence services provided beyond the territorial waters of
India are not liable to service tax as the provisions of the service tax have not been extended
to such areas so far.

STUDY XII: LEVY, COLLECTION AND PAYMENT OF SERVICE TAX
ALONG WITH CENVAT CREDIT RULES
This chapter may be replaced with the following:


LEARNING OBJECTIVES

This chapter covers the entire procedural as well substantive provisions relating to levy,
collection and payment of service tax and relevant CENVAT Credit Rules 2004. It also covers
the registration aspects, filing aspects including e-filing, appeal matters including appeal before
Appellate Tribunal. The new regime of service tax i.e. levy of service tax on negative list
approach have been discussed in the last chapter.
This chapter covers the following topics:
• Charge of Service tax
• Reverse Charge
• Basis of charge and Due Date for payment of service tax
• Point of Taxation Rules, 2011
• Registration
• Service Tax Registration of Special Category of Persons
• Records to be maintained
• Adjustment of Service Tax
• E-filing of Service Tax Returns
• Returns under Service Tax
• Recovery of Service Tax
• Provisional attachment pending adjudication
• Amount collected representing as service tax must be paid to Government
• Interest on delayed payment of service tax u/s 75
• Doctrine of unjust enrichment
• Penalties
• Waiver or reduction of penalty
• Advance Ruling
• CENVAT Credit Rules, 2004
• Abatement in Service Tax
• Appeals
• Appeals to Commissioner (Appeals)
• Appeals to Tribunal
• Role of Practicing Company Secretary
• Service Tax on Practicing Company Secretary

12.1 Charge of Service Tax
Section 66B -There shall be levied a tax (hereinafter referred to as the service tax) at the rate
of twelve per cent on the value of all services, other than those services specified in the


negative list, provided or agreed to be provided in the taxable territory by one person to
another and collected in such manner as may be prescribed.
12.2 Reverse Charge
As per Section 68, every person providing taxable services i.e. provider of output service is
liable to pay service tax. But in special cases service receiver is liable to pay service tax. This
is also known as reverse charge. Under this charge service receiver has to register himself
under service tax. Further service receiver cannot claim general exemption limit of 10 Lakhs
rupees and he is liable to pay service tax even on small amount.
Now after applicability of new service tax regime, new services which is very common like
advocate, Hiring vehicle for passenger has been added under reverse charge. Under the
new Service Tax regime, in few cases liability to pay service tax have been entrusted both on
service recipient and service provider. Below is the list of Services covered under Reverse
charge mechanism along with the share of service provider and service recipient share on
which they are required to pay service Tax.
Sl.No. Description of a Service Percentage of Percentage
service tax of service tax
payable by the payable by
person providing the person
service receiving the
service
1 Services provided or agreed to be provided
by an insurance agent to any person carrying
on insurance business Nil 100%
by a goods transport agency in respect of
transportation of goods by road Nil 100%
by way of sponsorship Nil 100%
by an arbitral tribunal Nil 100%
by individual advocate Nil 100%
by way of support service by Government or
local authority Nil 100%
7 (a) In respect of services provided or agreed
to be provided by way of renting or hiring
any motor vehicle designed to carry
passenger on abated value. Nil 100%
(b) In respect of services provided or agreed
to be provided by way of renting or hiring
any motor vehicle designed to carry
passenger on non abated value. 60% 40 %
8. Services provided or agreed to be provided
by way of supply of manpower for any purpose 25% 75 %


9. Services provided or agreed to be provided
by way of works contract 50% 50%
10 Any taxable services provided or agreed to
be provided by any person who is located in
a non-taxable territory and received by any person
located in the taxable territory (IMPORT
OF SERVICES) Nil 100%
12.3 Basis of Service Tax and Due Date for Payment of Service Tax
With effect from 1st April 2011, Finance Act, 2011 introduced Point of Taxation (POT) Rules,
2011. These rules laid down the provisions relating to payment of service tax on accrual
basis instead of receipt basis and specify the relevant date for determining rate of service
tax.
CBEC issued a circular MF(DR) DO F.NO. 334/3/2011-TRU dated 28-02-2011 clarifying that
the time of provision of service will be earliest of the following dates : (a) Date on which
service is provided or to be provided (ii) Date of invoice (iii) Date of Payment.
W.e.f. 1-04-2011 Rule 6(1) of the Service Tax Rules, 1994 has been amended,, which provides
that the service tax is to be paid to the credit of the Central Government by the 5th of the
month immediately following the calendar month in which service is deemed to have been
provided as per POT Rules made in this regard. However, where the assessee is an
individual or proprietary firm or partnership firm, the service tax shall be paid to the credit
of the Central Government by the 5th of the month immediately following the quarter in
which service is deemed to have been provided as per POT Rules made in this regard.
Where payment is made through internet banking, such e-payment can be made by 6th of
the month.
In case of individuals and partnership firms whose aggregate value of taxable services
provided from one or more premises is fifty lakh rupees or less in the previous financial
year, the service provider shall have option to pay the service tax on receipt basis by the due
dates upto the taxable services of ` 50 lacs.
POT Rules, 2011 make provisions in respect of date when a service shall be “deemed to be
provided”.
31st March will be the due date of payment for the month of March or for the quarter
ending March.
The assessee, who has paid service tax of rupees 10 lakh or above in the preceding financial
year or has already paid service tax of rupees 10 lakh in the current financial year, shall be
liable to pay service tax electronically.
Further, notwithstanding the time of receipt of payment towards the value of services, no
service tax is payable for the part or whole of the value of services, which is attributable to
services provided during the period when such services were not taxable.
Rule 6(2) prescribes that the assessee shall deposit the service tax liable to be paid by him
with the bank designated by the Central Board of Excise and Customs in Form TR-6 or in
any other manner prescribed by the Central Board of Excise & Customs.
Date of deposit of cheque will be treated as date of payment subject to realization of the
cheque.


12.4 Point of Taxation (POT) Rules, 2011
1. Point of taxation means the point in time when a service shall be deemed to have been
provided. This Point of time will determine rate of service tax and due date of payment
of service tax.
As per rule 2A “Date of payment” shall be the earlier of the dates on which the payment
is entered in the books of accounts or is credited to the bank account of the person liable
to pay tax:
Provided that —
(A) the date of payment shall be the date of credit in the bank account when —
(i) there is a change in effective rate of tax or when a service is taxed for the first
time during the period between such entry in books of accounts and its credit in
the bank account; and
(ii) the credit in the bank account is after four working days from the date when
there is change in effective rate of tax or a service is taxed for the first time; and
(iii) the payment is made by way of an instrument which is credited to a bank
account,
(B) if any rule requires determination of the time or date of payment received, the
expression “date of payment” shall be construed to mean such date on which the
payment is received”.
As per Rule 3 point of taxation shall be (a) the time when the invoice for service
provided or to be provided is issued.(b) in case where payment is received before the
issue of invoice then the time when such payment is received and (c) where advance
is received by the service provider the time of receipt of such advance.
Rule 4A of the Service Tax Rules, 1994, provides that every person providing taxable
service shall issue invoice within 30 days of completion of service or receipt of
service whichever is earlier. Further proviso to Rule 3 of POT Rules, provides that
where the invoice is not issued within 30 days of completion of service than the
point of taxation shall the date of completion of such service.

Examples:
S. No. Date of Date of Date on which Point of Remarks
Completion Invoice payment is taxation
of service received
1 April 10, 2011 April 20, 2011 April 30, 2011 April 20, 2011 Invoice is issued
within 30 days
and before
payment
2 April 10, 2011 May 26, 2011 April 30, 2011 April 10, 2011 Invoice not issued
within 30 days
and payment


received after
completion of
service
3 April 10, 2011 April 20, 2011 April 15, 2011 April 15, 2011 Invoice is issued
within 30 days
and payment
received before
issue of invoice
4 April 10, 2011 May 26, 2011 April 5, 2011 April 5, 2011 Advance received
(Part) and and April 10, in part before
April 25, 2011 2011 for completion of
(remaining) remaining service and
invoice not issued
within 30 days of
completion of
service.
2. Point of Taxation in case of specified services or persons
The point of taxation in respect of the persons required to pay tax as recipients of service
under the rules made in this regard in respect of services notified under sub-section (2) of
section 68 of the Act, shall be the date on which payment is made.
Provided that, where the payment is not made within a period of six months of the date of
invoice, the point of taxation shall be determined as if this rule does not exist.
Provided further that in case of “associated enterprises”, where the person providing the
service is located outside India, the point of taxation shall be the date of debit in the books of
account of the person receiving the service or date of making the payment whichever is
earlier.
3. Point of taxation where service is taxed first time
Where a service is taxed for the first time, then,—
(a) no tax shall be payable to the extent the invoice has been issued and the payment
received against such invoice before such service became taxable;
(b) no tax shall be payable if the payment has been received before the service becomes
taxable and invoice has been issued within fourteen days of the date when the service is
taxed for the first time.
4. Determination of point of taxation in other cases
Where the point of taxation cannot be determined as per these rules as the date of invoice or
the date of payment or both are not available, the Central Excise officer, may, require the
concerned person to produce such accounts, documents or other evidence as he may deem
necessary and after taking into account such material and the effective rate of tax prevalent
at different points of time, shall, by an order in writing, after giving an opportunity of being
heard, determine the point of taxation to the best of his judgment.”.


5. Continuous supply of service
“Continuous supply of service” means any service provided or agreed to be provided
continuously or on recurrent basis, under a contract, for a period for a period exceeding
three months with the obligation for payment periodically or from time to time. Further,
Central Government may notify provision of a particular service to be considered as
continuous supply of service.
Telecommunication service and Works contract services have been notified as continuous
supply of service irrespective of period for which they are provided or to be provided vide
Notification No. 28/2011.
In case of continuous supply of service, the point of taxation shall be the date of completion
of the events as specified in the contract or time when invoice for the service provided or to
be provided is issued or the date on which payment received whichever is earlier. Where
any advance is received by the service provider the point of taxation shall be date of receipt
of each such advance.

Test Your Knowledge
Where payment for service tax is made through internet banking, such e-payment can be
made by the________ of the month, immediately following the quarter in which the
payments are received.
(a) 5th
(b) 6th
(c) 8th
(d) 10th
Correct answer: (b)

12.5 Registration
Section 69 of the Finance Act, read with Rule 4 of the Service Tax Rules make provisions
relating to registration. It is mandatory for every person liable to pay service tax to get
registered with Superintendent of Central Excise. A person providing a taxable service is
liable to pay service tax in terms of Section 68.
12.5.1 Who Shall Apply?
An application for registration to the Superintendent of Central Excise can be made in form
(ST-1). This is to be made within a period of thirty days from the date on which the service
tax is leviable.
ST-1 Form shall be accompanied by the following documents:
— Permanent Account number (PAN);
— An affidavit declaring the commencement of the services;
— Copy of passport/ration card etc., showing proof of residence;


— Passport size photograph of the assessee in case of an individual. In case of partnership
firm, copy of partnership deed duly certified to be true copy along with registration
certificate in case the firm is registered;
— In case of corporate assessee, copy of memorandum, articles of association duly certified
to be true copy by the director.
12.5.2 Single Registration for Multiple Services
In case the taxable services are provided from more than one premises/ offices, the assessee
can opt for registration for only one premises if there is a system of centralised
billing/centralised accounting with permission from Department. Where an assessee is
providing more than one taxable service, he can obtain registration by making a single
application mentioning all the taxable services provided by him.

Where an assessee seeks to obtain single registration for more than one premises, he has to
apply before the Chief Commissioner/Commissioner of Central Excise if all the offices are
falling under the jurisdiction of one Chief Commissioner/ Commissioner or before the
Director General of Service Tax (DGST) if his offices are falling under the jurisdiction of
more than one chief commissioners. Registration application before the DGST shall be
submitting through the jurisdictional office of the Assistant/Deputy Commissioner of
Central Excise.

12.5.3 Issue of Registration Certificate

The Superintendent of Central excise is bound to grant a certificate of registration in Form
ST-2 within 7 days of the date of receipt of the application. This certificate shall indicate the
details of all the taxable services provided by the service provider. In case of transfer of
business by the assessee to another person, the transferee is required to obtain a fresh
Certificate of Registration.

12.5.4 Surrender of Certificate of Registration

The registered assessee who ceases to provide the taxable services for which he had been
registered shall surrender his Certificate of Registration to the concerned Superintendent of
Central Excise. There may also be a partial surrender where some of the services rendered
by the assessee are discontinued. In such case, he shall intimate it to the concerned
Superintendent of Central Excise to get it endorsed on the registration certificate.

Test Your Knowledge
Any provider of taxable service whose aggregate value of taxable service in a financial
year exceeds __________ shall make an application for registration to the jurisdictional
Superintendent of Central Excise.
(a) ` 3,00,000
(b) ` 5,00,000
(c) ` 7,00,000
(d) ` 9,00,000
Correct answer: (d)


12.6 Service Tax Registration of Special Category of Persons
Service Tax (Registration of Special Category of Persons) Rules, 2005 have come into effect
on 16th day of June, 2005.
Registration
Registration under these rules can be obtained by an input service distributor by making an
application to the jurisdictional Superintendent of Central Excise in such form as specified
by the Board within a period of thirty days of the commencement of business or the 16th
day of June, 2005, whichever is later.
Any provider of taxable service whose aggregate value of taxable service in a financial year
exceeds nine lakh rupees shall make an application to the jurisdictional Superintendent of
Central Excise in the prescribed form for registration within a period of thirty days of
exceeding the aggregate value of taxable service of nine lakh rupees.
12.6.1 Furnishing of Return
The input service distributor shall furnish a return to the jurisdictional Superintendent of
Central Excise in such form and at such intervals as prescribed under Rule 9(10) of
CENVAT Credit Rules, 2004. The CENVAT Credit Rules prescribe half yearly returns to be
submitted by month end from the close of the half year.
The term, “aggregate value of taxable service” means the sum total of first consecutive
payments received during a financial year towards the gross amount, as prescribed under
Section 67 of the Act, charged by the service provider towards taxable services but does not
include payments received towards such gross amount which are exempt from the whole of
service tax leviable thereon under Section 66 of the Act under any notification other than
Notification No. 6/2005-Service Tax, dated the 1st March, 2005 [G.S.R. 140(E), dated the 1st
March, 2005].
The term, “input service distributor” shall have the meaning assigned to it in Clause (m) of
Rule 2 of the CENVAT Credit Rules, 2004.
12.8 Records to be maintained
Every assessee is required to furnish to the Superintendent of Central Excise at the time of
filing his return for the first time, a list of all accounts maintained by him in relation to
service tax including memoranda received from his branch offices. All types of records
including computerized data as maintained by an assessee as per various laws in force from
time to time shall be acceptable.
Rule 5(1) of the Service Tax Rules, 1994 makes acceptable the records (including
computerized data) as maintained by an assessee in accordance with the various laws in
force. Further, every assessee is required to furnish to the Superintendent of Central Excise
at the time of filing his return for the first time a list of all accounts maintained by the
assessee in relation to service tax including memoranda received in branch offices [Rule
5(2)].
12.9 Adjustment of Service Tax
Where an assessee has paid to the credit of Central Government any amount in excess of the
amount required to be paid towards service tax liability for a month or quarter, the assessee


may adjust such excess amount paid by him against his service tax liability for the
succeeding month or quarter.
The adjustment of excess amount paid, shall be subject to the condition that the excess
amount paid is on account of reasons not involving interpretation of law, taxability,
valuation or applicability of any exemption notification.
12.10 Returns under Service Tax
Rule 7 of the Service Tax Rules,1994 return under Service Tax is required to be filed by every
assessee on half yearly basis in Form ST-3 or Form ST-3A, as the case may be, along with a
copy of the Form TR-6, in triplicate for the months covered in the half-yearly return.
Every assessee shall submit the half yearly return by the 25th of the month following the
particular half-year.
12.10.1 E-Filing of Service Tax Returns
The Government allowed filing of service tax return electronically from April 2003 on only
ten select classes or group of service tax providers on optional basis, now from January 2004
it is extended to all the taxable services. This facility is available on the website
http://servicetaxefiling.nic.in. Assesses having a 15-digit Service Tax Payers (STP) code can
avail of the facility of electronic filing of their return. Now, vide Notification No. 43/2011 dt.
25th August 2011, every Assessee shall submit a half yearly return electronically. The
assessee is thereupon provided a unique user name and password. The assessee gets a
computer-generated acknowledgement for evidence of having filed the return.
With effect from 1st October, 2011, every assessee is required to file half yearly return
electronically.
12.10.2 Revision of Returns
As per Rule 7B, an assessee may submit a revised return, in Form ST-3, in triplicate, to
correct a mistake or omission, within a period of ninety days from the date of submission of
the return under rule 7
Similar facility is also there for returns to be filed by assessee under CENVAT Credit Rules,
2004 [Rule 9(11) of CENVAT Credit Rules].
12.10.3 Penalty for late Filing of Return
If return of service tax is not filed within the prescribed period penalty is leviable under
section 77(2) which can be upto `10,000.
Section 70(1) with effect from 11.5.2007 provides for late fee also. Accordingly late fee is
payable as follows: (Rule 7C of Service Tax Rules, 1994). If late fee is paid then no penalty
shall be leviable.
Delay upto 15 days ` 500/-
Delay upto 30 days ` 1,000/-
Delay beond 30 days ` 1,000 + ` 100/- per day subject to a maximum of `
20,000/-


12.11 Recovery of Service Tax
Central Excise Officers have been empowered to demand duty, impose penalty and
confiscate offending goods. They can also sanction refund claims. They are ‘adjudicating
authorities’. These are ‘quasi juridical authorities’.
Central Excise Officers have been empowered to adjudicate in following:
— Demand of service tax and its recovery – Section 73.
— Rectification of mistake by amending its own order – Section 74.
— Imposition of penalty – Section 83A inserted w.e.f. 13 May 2005.
— Refund of service tax – Section 11B of Central Excise Act made applicable to Service Tax.
12.11.1 Recovery of service tax not levied or paid or short levied or short paid or erroneously
refunded section 73(1)
(A) Time Limit for Issue of show cause notice
Where any service tax has not been levied or paid or has been short-levied or short-paid or
erroneously refunded, the Central Excise Officer may, within 18 months from the relevant
date, serve notice on the person chargeable with the service tax which has not been levied or
paid or which has been short-levied or short-paid or the person to whom such tax refund
has erroneously been made, requiring him to show cause why he should not pay the
amount specified in the notice:
Provided that where any service tax has not been levied or paid or has been short-levied or
short-paid or erroneously refunded by reason of —
(a) fraud; or
(b) collusion; or
(c) wilful mis-statement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or of the rules made there under
with intent to evade payment of service tax, by the person chargeable with the service
tax or his agent, the provisions of this sub-section shall have effect, as if, for the words
“eighteen months”, the words “five years” had been substituted.
(B) Relevant date for issue of show cause notice
Relevant date for calculating limit of eighteen months/five year for issue of show cause
notice is as follows [Section 73(6)]:
(i) In the case of taxable service in respect of which service tax has not been levied or paid
or has been short levied or short paid – (a) Where a periodic return is to be filed, the date
on which such return was filed. (b) Where no return was filed, the last date on which the
return should have been filed under Service Tax Rules. (c) In any other case, the date on
which service tax is to be paid under provisions of Finance Act, 1994 or Service Tax
Rules, 1994.
(ii) In case where service tax is provisionally assessed, the date of adjustment of service tax
after final assessment thereof.


(iii) In case any sum relating to service tax, has been erroneously refunded, the date of such
refund.
(C) Payment before receipt of show cause notice
Assessee may pay such tax on the basis of own ascertainment or on the basis of tax
ascertained by Central Excise Officer, before issue of show cause notice. After payment of
tax, assessee should inform the Central Excise Officer in writing about such payment, and
then the central excise officer shall not issue any show cause notice under Section 73(1) in
respect of service tax so paid [Section 73(3)].
However, even after such payment, show cause notice for further amount can be issued
within eighteen months from the date on which the assessee had informed the Central
Excise Officer about payment of service tax by him [proviso to Section 73(3)].
Even after payment of tax by assessee, demand can be raised within five years in case of
suppression of facts, fraud, collusion, willful misstatement or contravention of any
provision with intent to evade service tax [Section 73(4)].
No show cause notice shall be issued where the person chargeable to tax pay the service tax
along with interest and penalty equal to 1% per month for the period during which default
continues maximum to 25% of the tax amount where during the course of audit ,
investigation or verification it is found that any service tax has not been levied or paid or
has been short-paid or erroneously refunded.
12.12 Provisional Attachment Pending Adjudication
Finance Act, 2006 has added a provision for provisional attachment of property of a person
to whom show cause notice has been serviced under Sections 73 or 73A, if the Central Excise
Officer is of the opinion that it is necessary to do so, to protect interests of revenue. He can
do so only with previous approval of Commissioner of Central Excise [Section 73C(1)
inserted w.e.f. 18.4.2006].
The provision seems to be harsh and may lead to harassment of assessees, though some
safeguards have been kept.
The attachment can be done only in a manner prescribed by rules and only with previous
written approval of Commissioner.
The attachment will cease to have effect after six months from date of order of attachment
[Section 73C(2)]. This period can be extended with written permission of Chief
Commissioner of Central Excise, but total period of extension cannot be for more than two
years.
12.13 Amount Collected Representing as Service Tax must be paid to Government
If a person liable to pay service tax collects from recipient of taxable service, an amount
representing as service tax, in excess of service tax assessed or determined and paid on any
taxable service, the excess amount must be deposited forthwith with Government [Section
73A(1) inserted w.e.f. 18.4.2006].
If a person collects from any person an amount representing it as service tax when not
required to be collected, he shall forthwith deposit the amount so collected to Government
[Section 73A(2) inserted w.e.f. 18.4.2006].


Thus, the provision applies even in cases where person collects an amount representing it as
‘service tax’, though the amount was not ‘required’ to be collected ‘Required’ means
‘required’ under any law.
12.14 Interest on Delayed Payment of Service Tax under Section 75
Every person, liable to pay the tax in accordance with the provisions of section 68 or rules
made thereunder, who fails to credit the tax or any part thereof to the account of the Central
Government within the period prescribed, shall pay simple interest at such rate not below
10% and not exceeding 36% p.a.
However where the service provider whose taxable services does not exceed `60 lakhs
during any of the financial years covered by the notice or during the last financial year the
rate of interest shall be reduced by 3% p.a
12.15 Doctrine of Unjust Enrichment
Since service tax is indirect tax, it is recoverable from customer. If you recover the amount
from customer and again claim refund, you will get double benefit. Hence, provision of
‘unjust enrichment’ has been made in the law.
As per the doctrine of unjust enrichment, refund will be granted to assessee only if assessee
had not passed on the tax burden to your customer/client. It will be presumed that assessee
has passed on the burden of service tax. Thus, assessee will have to prove that he has not
passed on the burden to your customer. If he is unable to prove it, refund will be paid to
‘Consumer Welfare Fund’ and not to assessee, as provided in Section 12C of Central Excise
Act.
If assessee has shown the amount of service tax separately in invoice (which assessee is
legally required to do), it will be difficult for assessee to establish that he has not passed on
the tax burden to the client/customer.
Refund of service tax is governed by provisions of Section 11B of Central Excise Act –
confirmed in International Security Organisation v. CCE 2002 (CEGAT).
If application for refund is rejected by AC/DC, appeal can be filed with Commissioner
(Appeals).
12.16 Penalties
Various penalties have been provided under the Act. The penalties can be imposed by
Central Excise Officers. There is no provision for prosecution under the Act.
(A) Penalty for failure to pay service tax [Section 76]
Any person who fails to pay service tax, shall pay, in addition to such tax and the
interest on that tax amount in accordance with the provisions of section 75, a penalty
which shall not be less than;
— one hundred rupees for every day during which such failure continues;or
— at the rate of one per cent. of such tax, per month, whichever is higher, starting with
the first day after the due date till the date of actual payment of the outstanding
amount of service tax.


Provided that the total amount of the penalty payable in terms of this section shall not
exceed 50% of the service tax payable.
Illustration
X, an assessee, fails to pay service tax of ` 10 lakhs payable by 5th March. X pays the
amount on 15th March. The default has continued for 10 days. The penalty payable by X
is computed as follows:-
— 1% of the amount of default for 10 days = 1 x 10, 00, 000 x 10/31= `3,225.80 or
— Penalty calculated @ ` 100 per day for 10 days = `1,000
Penalty liable to be paid is ` 3,226.00.
(B) Penalty for contravention of rules and provisions of act for which no penalty is
specified elsewhere [Section 77]
(a) Any person who is liable to pay service tax, or required to take registration, fails to
take registration shall be liable to pay a penalty which may extend to;
— ten thousand rupees or
— two hundred rupees for every day during which such failure continues,
whichever is higher, starting with the first day after the due date, till the date
of actual compliance.
(b) Any person who fails to keep, maintain or retain books of account and other
documents shall be liable to a penalty which may extend to ten thousand rupees.
(c) Any person who fails to —
(i) furnish information called by an
(ii) produce documents called for by a Central Excise Officer
(iii) appear before the Central Excise Officer, when issued with a summon for
appearance to give evidence or to produce a document in an inquiry, shall be
liable to a penalty which may extend to;
— ten thousand rupees or
— two hundred rupees for every day during which such failure continues,
whichever is higher, starting with the first day after the due date, till the date
of actual compliance.
(d) Any person who is required to pay tax electronically, through internet banking, fails
to pay the tax electronically, shall be liable to a penalty which may extend to ten
thousand rupees.
(e) Any person who issues invoice with incorrect or incomplete details or fails to
account for an invoice in his books of account, shall be liable to a penalty which may
extend to ten thousand rupees.
(2) Any person, who contravenes any of the provisions or any rules for which no
penalty is separately provided, shall be liable to a penalty which may extend to Ten
thousand rupees


(C) Penalty for suppressing value of taxable service [Section 78]
Where any service tax has not been levied or paid or has been short-levied or short-paid
or erroneously refunded, by reason of
(a) fraud; or
(b) collusion; or
(c) wilful mis-statement; or
(d) suppression of facts; or
(e) contravention of any of the provisions or of the rules with intent to evade payment
of service tax the person shall be liable to pay service tax or erroneous refund, and
also be liable to pay a penalty, in addition to such service tax and interest which shall
equal to the amount of service tax so not levied or short-paid or erroneously
refunded.
However the amount of penalty shall be reduced to:
(a) 50% where true and complete details of the transactions are available in the specified
records.
(b) 25% where true and complete details of the transactions are available in the specified
records and the amount of service tax, interest and penalty has been paid within 30
days.
In case of service providers whose taxable value of service tax does not exceed ` 60
lakhs, the period of 30 days shall be extended to 90 days.
12.17 Waiver or Reduction of Penalty
As per Section 80, penalty under Sections 76, 77 or first proviso to section78(1) can be
waived if assessee proves that he had reasonable cause for the failure.
In CCE v. Milan Tent Palace 2001 (CEGAT), it was held that penalty is not mandatory and
can be waived or reduced in deserving cases.
Who can impose penalty
Section 83A (inserted w.e.f. 13.5.2005) empowers Central Excise Officer to adjudicate
penalty within such powers as may be conferred by CBEC, by issuing a notification.
12.18 Advance Ruling
“Advance ruling” means the determination, by the Authority, of a question of law or fact
specified in the application regarding the liability to pay service tax in relation to a service
proposed to be provided, by the applicant.
“applicant” means—
(i) (a) a non-resident setting up a joint venture in India in collaboration with a non-resident
or a resident; or
(b) a resident setting up a joint venture in India in collaboration with a non-resident; or


(c) a wholly owned subsidiary Indian company, of which the holding company is a
foreign company, who or which, as the case may be, proposes to undertake any
business activity in India.
(ii) a joint venture in India.
(iii) a resident falling within any such class or category of persons, as the Central
Government may, by notification in the Official Gazette, specify in this behalf.
An applicant desirous of obtaining an advance ruling under this Chapter may make an
application in such form and in such manner as may be prescribed, stating the question on
which the advance ruling is sought.
The question on which the advance ruling is sought shall be in respect of,-
(a) classification of any service as a taxable service under Chapter V;
(b) the valuation of taxable services for charging service tax;
(c) the principles to be adopted for the purposes of determination of value of the taxable
service under the provisions of Chapter V;
(d) applicability of notifications issued under Chapter V;
(e) admissibility of credit of service tax;
(f) determination of the liability to pay service tax on a taxable service under the provisions
of Chapter V.
The application shall be made in quadruplicate and be accompanied by a fee of two
thousand five hundred rupees.
An applicant may withdraw an application within thirty days from the date of the
application.
The authority is required to give its ruling within 90 days of the receipt of valid application.
An application may be rejected by the prescribed authority if the question or subject matter
of ruling sought in the application is such which is already pending before any assessing
officer, Tribunal and court of law or such question already stands decided by any court or
bench of Tribunal.
The advance ruling pronounced by the Authority shall be binding only-
(a) on the applicant who had sought it;
(b) on the Commissioner of Central Excise, and the Central Excise authorities subordinate to
him, in respect of the applicant.
The advance ruling shall be binding unless there is a change in law or facts on the basis of
which the advance ruling has been pronounced.
No proceeding before, or pronouncement of advance ruling by, the Authority shall be
invalid on the ground merely of the existence of any vacancy or defect in the constitution of
the Authority.


Test Your Knowledge
What is the fee for application for advance ruling ?
(a) ` 500
(b) ` 1,000
(c) ` 1,500
(d) ` 2,500
Correct answer : d

12.19 CENVAT Credit Rules, 2004
The Finance Ministry has issued CENVAT Credit Rules following the budget decisions to
extend credit of input taxes across goods and services from 10.09.2004. The Finance Act,
2004 has amended section 94 to provide that Central Government is empowered to make
rules relating to inter-sectoral credit of service tax and excise duty. The move will facilitate
integration of tax on goods and services (GST). The New CENVAT Credit Rules contain
Rules for goods and services. Rules cover inputs, capital goods and services. The burden of
proof regarding the adminisibility of CENVAT Credit is on the manufacturer or service
provider who is availing credit. A new levy of education and higher secondary education
cess has been imposed subject to CENVAT Credit and it shall be used only for the payment
of such additional charge on output services/products. It is clear that the Central
Government is trying to widen the tax bracket to include those services which till now is not
brought under the tax provision. Earlier a threshold limit of four lakhs exemption is
provided to the service provider and that limit was increased to ` 8 lakhs but from 1-04-2008
the exemption limit was increased to `10 lakhs. Cenvat credit of inputs and input services is
not available if final product/output service is exempt from excise duty/service tax. In case
of manufacturer manufacturing both exempt and dutiable goods (or service provider
providing taxable as well as exempt services), it may happen that same inputs/input
services are used partly for manufacture of dutiable goods/taxable services and partly for
exempted goods/services.
In such cases, the manufacturer/service provider has following three options (w.e.f.
1.4.2011) —
(1) Maintain separate account for inventory receipt, inputs and input services used for
exempted goods/exempted output services and used for dutiable final products or for
the provision of taxable output services.– (Rule 6(2) of Cenvat Credit Rules).
(2) Don’t Maintain Separate Account
(a) Pay amount equal to 6% of value of exempted goods (if he is ‘manufacturer’) and/or
6% of value of exempted services (if he is service provider) if he does not maintain
separate inventory and records – Rule 6(3)(i);
(b) Pay an amount as determined in Sub-Rule (3A);
(c) Maintain separate accounts for inputs and pay ‘amount’ as determined under
Rule 6(3A) in respect of input services.
“Input Services”


Rule 2(l)(ii) of Cenvat Credit Rules, which defines ‘input service’ is amended w.e.f. 1.4.2011
as follows. “Input service” means any service –
(i) used by a provider of output service for providing an output service; or
(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the
manufacture of final products and clearance of final products upto the place of
removal,and
Includes
services used in relation to modernisation, renovation or repairs of a factory, premises of
provider of output service or an office relating to such factory or premises, advertisement or
sales promotion, market research, storage upto the place of removal, procurement of inputs,
accounting, auditing, financing, recruitment and quality control, coaching and training,
computer networking, credit rating, share registry, security, business exhibition, legal
services, inward transportation of inputs or capital goods and outward transportation upto
the place of removal;
but excludes services,-
(A) service portion in the execution of a works contract and construction services
including service listed under clause (b) of section 66E of the Finance Act (hereinafter
referred as specified services) in so far as they are used for –
(a) construction or execution of a works contract of a building or a civil structure or part
thereof; or
(b) laying of foundation or making of structures for support of capital goods, except for
the provision of one or more of the specified services; or
(B) services provided by way of renting of a motor vehicle in so far as they relate to a motor
vehicle which is not a capital goods; or
(BA) service of general insurance business, servicing, repair and maintenance, in so far as
they relate to a
(C) such as those provided in relation to outdoor catering, beauty treatment, health services,
cosmetic and plastic surgery, membership of a club, health and fitness centre, life
insurance, health insurance and travel benefits extended to employees on vacation such
as Leave or Home Travel Concession, when such services are used primarily for
personal use or consumption of any employee.
Provisions of Cenvat Credit Rules relating to Service tax
1. For a service provider the use of inputs and capital goods must be direct and they must
be used for providing output service. Otherwise Cenvat Credit is not available on them.
2. Motor vehicles registered in the name of the service provider will be treated as capital
goods for specified services such as outdoor catering, rent a cab, cargo handling, goods
transport agency, tour operator & courier agencies.
3. Cenvat credit on service tax can be taken only when both service tax and service charge
has been paid.


4. Service provider is not eligible take credit on special CVD paid on imported goods.
5. Service tax paid on input services by Input service distributor can be distributed among
its constituent units.
6. In the budget 2008 service provider is allowed to transfer credit on inputs and capital
goods to its other offices. For that registration under Central Excise is necessary.
7. A service provider has to reverse the Cenvat credit when he removes the inputs or
capital goods as such.
But no reversal is necessary if such inputs or capital goods are taken out for providing
output service.
8. Cenvat credit on service tax can be taken on the strength of documents such as challan,
Bill or invoice.
9. If the service provider uses inputs or input services both for exempted and taxable
services, he should take credit proportionately by maintaining separate accounts.
Otherwise he has to pay 5% on exempted services also.
12.20 Abatement in Service Tax
Abatement in Service Tax is a major relief to certain kinds of services which are chargeable
to service tax. Finance Act 1994 provides that for determining value of service tax on which
service tax is to be charges, abatement in value determination is allowed.
Abatement under service tax laws mean that for certain services, a specified percentage of
discount is allowed from the gross amount collected for rendering the services subject to the
conditions that CENVAT Credit has not been availed by the service provider.
Notification No. 26/2012- ST dated 20/06/2012 provides the list of services on which
abatement is allowed. It also provides for the percentage on which service tax is payable
under the scheme of abatement. The concept of abatement may be understood with the help
of example
As per notification no. 26/2012, railways is require to charge service tax only on 30% value
of the Taxable services. Thereby by virtue of this provision, if railways receive an amount of
` 50 Lakhs against the services, it needs to pay service tax only on ` 15 Lakhs i.e. 30% value
of ` 50 Lakhs.
12.21 Appeals
Appeal can be filed against adjudication order as per following provisions.
If adjudication order is passed by authority lower than Commissioner of Central Excise, first
appeal will be with Commissioner (Appeals) under Section 85(1) within three months from
date of receipt of order made before the 28th May 2012 (the date Finance Bill receives the
assent of the president) of adjudicating authority. Further, the appeal shall be presented
within two months from the date of receipt of order made on and after 28th May 2012.
Second and final appeal is with Appellate Tribunal (known as – Customs, Excise and
Service Tax Appellate Tribunal – CESTAT) under Section 86(1). Appeal is required to be
filed within three months of the date of receipt of the order.


If adjudication order is passed by Commissioner, appeal is to be filed to CESTAT under
Section 86(1) within four months from the date on which the order sought to be appealed
against is recieved. The adjudicating order of Commissioner may be in respect of following
– (a) Original adjudication of demand under Section 73, (b) Imposition of penalty under
Section 83A.
12.21.1 Appeals to the Commissioner of Central Excise (Appeals) [Section 85]
— Any person aggrieved by any decision or order passed by an adjudicating authority
subordinate to the Commissioner of Central Excise may appeal to the Commissioner of
Central Excise (Appeals).
— Every appeal shall be in the prescribed form and shall be verified in the prescribed
manner.
— An appeal shall be presented within three months from date of receipt of order made
before the 28th May 2012 (the date Finance Bill receives the assent of the president) of
adjudicating authority. Further, the appeal shall be presented within two months from
the date of receipt of order made on and after 28th May 2012.
Condonation of delay
— The Commissioner of Central Excise (Appeals) may, if he is satisfied that the appellant
was prevented by sufficient cause from presenting the appeal within the aforesaid
period of three months, allow it to be presented within a further period of three months
if the order made before 28th May 2012. If order made on and after 28th May 2012 then
the delay may be condoned for a further period of one month.
— The Commissioner of Central Excise (Appeals) shall hear and determine the appeals
and, pass such orders as he thinks fit and such orders may include an order enhancing
the service tax, interest or penalty
Principle of Natural Justice
— an order enhancing the service tax, interest or penalty shall not be made unless the
person affected thereby has been given a reasonable opportunity of showing cause
against such enhancement.
12.21.2 Appeal to Tribunal (Section 86)
Any assessee aggrieved by an order passed by a Commissioner of Central Excise under
section 73 or section 83A, or an order passed by a Commissioner of Central Excise (Appeals)
under section 85, may appeal to the Appellate Tribunal against such order.
The Committee of Chief Commissioners of Central Excise may, if it objects to any order
passed by the Commissioner of Central Excise under section 73 or section 83A or section 84,
or by the Commissioner of Central Excise(Appeals) under section 85 direct the
Commissioner of Central Excise to appeal to the Appellate Tribunal against the order.
Every appeal shall be filed within four months of the date on which the order sought to be
appealed against is received by the assessee, the Committee of Chief Commissioners.
The Commissioner of Central Excise or any Central Excise Officer subordinate to him or the
assessee, notwithstanding that he may not have appealed against such order within forty-


five days of the receipt of the notice, file a memorandum of cross-objections, verified in the
prescribed manner.
The Appellate Tribunal may admit an appeal or permit the filing of a memorandum of
cross-objections after the expiry of the relevant period if it is satisfied that there was
sufficient cause for not presenting it within that period.
Every application made before the Appellate Tribunal,
(a) in an appeal for grant of stay or for rectification of mistake or for any other purpose; or
(b) for restoration of an appeal or an application, shall be accompanied by a fee of five
hundred rupees.
Provided that no such fee shall be payable in the case of an application filed by the
Commissioner of Central Excise or Assistant Commissioner of Central Excise or Deputy
Commissioner of Central Excise.
12.21.3 Further Appeals
Further appeals against order of Tribunal (CESTAT) lies with Supreme Court only in
matters of valuation and classification. If there is substantial question of law (other than
classification and valuation), appeal has to be filed with High Court.
12.22 Role of Practicing Company Secretary
The educational background, knowledge, training and exposure that a Company Secretary
has, makes him a versatile professional capable of rendering a wide range of services to
companies of all sizes, other commercial and industrial organizations, small scale units,
firms etc.
A Practicing Company Secretary can render several services under the Service Tax such as;
— open a Certified Facilitation Centre under ACES project of CBEC by making an
application to ICSI;
— registration with tax authorities;
— advising on applicability, rate and payment of service tax;
— filing of returns with the authorities;
— claiming exemption;
— advising on various procedural matters relating to service tax.
12.23 Service Tax on Practicing Company Secretary
Regarding taxable services provided by Company Secretaries in Practice, the following is
the position of the law:
As per Section 2(2) of Company Secretaries Act, 1980 a member of the Institute shall be
deemed “to be in practice” when, individually or in partnership with one or more members
of the Institute in practice or in partnership with members of such other recognized
professions as may be prescribed, he, in consideration of remuneration received or to be
received:


(a) engages himself in the practice of the profession of Company Secretaries to, or in
relation to, any company; or
(b) offers to perform or performs services in relation to the promotion, forming,
incorporation, amalgamation, reconstruction, reorganization or winding up of
companies; or
(c) offers to perform or performs such services as may be performed by—
(i) an authorised representative of a company with respect to filing, registering,
presenting, attesting or verifying any documents (including forms, applications and
returns) by or on behalf of the company,
(ii) a share transfer agent,
(iii) an issue house,
(iv) a share and stock broker,
(v) a secretarial auditor or consultant,
(vi) an adviser to a company on management, including any legal or procedural matter
falling under the Capital Issues (Control) Act, 1947 (29 of 1947), the Industries
(Development and Regulation) Act, 1951 (65 of 1951), the Companies Act, the
Securities Contracts (Regulation) Act, 1956 (42 of 1956), any of the rules or bye-laws
made by a recognized stock exchange, the Monopolies and Restrictive Trade
Practices Act, 1969 (54 of 1969), the Foreign Exchange Regulation Act, 1973 (46 of
1973), or under any other law for the time being in force.
(vii) issuing certificates on behalf of, or for the purposes of, a company; or
(d) holds himself out to the public as a Company Secretary in practice; or
(e) renders professional services or assistance with respect to matters of principle or detail
relating to the practice of the profession of Company Secretaries; or
(f) renders such other services as, in the opinion of the Council, are or may be rendered by
a Company Secretary in practice;
and the words “to be in practice” with their grammatical variations and cognate
expressions, shall be construed accordingly.”
The government has issued a Notification in 2006 exempting the taxable services provided
or to be provided by a company secretary in his professional capacity to a client, relating to
representing the client before any statutory authority in the cause of proceedings initiated
under any law for the time being in force, by way of issue of notice. The text of Notification
is reproduced below:

GOVERNMENT OF INDIA
MINISTRY OF FINANCE
(Department of Revenue)
Notification No. 25/2006-Service Tax
New Delhi, dated the 13th July, 2006


22 Asadha, 1928 (Saka)
G.S.R.418(E)—In exercise of the powers conferred by Sub-section (1) of Section 93 of the Finance
Act 1994 (32 of 1994) hereinafter referred to as the Finance Act), the Central Government, on being
satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services
falling under sub-clauses (s), (t) and (u) of clause (105) of Section 65 of the Finance Act, provided or
to be provided by a practicing chartered accountant, a practicing cost accountant and a practicing
Company Secretary respectively, in his professional capacity, to a client, relating to representing the
client before any statutory authority in the course of proceedings initiated under any law for the
time being in force, by way of issue of notice, from the whole of service tax leviable thereon under
Section 66 of the said Finance Act.
(R. Sriram)
Deputy Secretary to the Government of India
The above notification rescinded by issue of Notification No. 32/2011 dt. 25/04/2011 as a
result of which all services provided by practicing company secretaries are taxable.
ST : Chartered Accountants/Company Secretaries/Cost & Accountants – Exemption from service
tax on taxable services provided by
Practising Chartered Accountant, etc., - Recession of
Notification No. 25/2006-ST, dated 13-7-2006
NOTIFICATION NO. 32/2011 – SERVICE TAX, DATED 25-4-2011
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1944 (32
of 1994), the Central Government, on being satisfied that it is necessary in the public interest so to
do, hereby rescinds the notification of the Governmnent of India in the Ministry of Finance
(Department of Revenue) No. 25/2006 – Service Tax, dated the 13th July, 2006, published in the
Gazzete of India, Extraordinary, Part II, Section 3, Sub-section (i) vide number G.S.R. 418(E), dated
the 13th July, 2006, except as respects things done or omitted to be done before such rescission.
2. This notification shall come into force on the 1st day of May, 2011.

B. CENTRAL EXCISE (CENTRAL EXCISE ACT, 1944)

1. Procedure for fixation of value under section 4:

Definition of “Inter Connected Undertakings”

"Inter-connected undertakings" means two or more undertakings which are inter-connected with
each other in any of the following manners, namely:––
(A) if one owns or controls the other;
(B) where the undertakings are owned by firms, if such firms have one or more common
partners;
(C) where the undertakings are owned by bodies corporate,––
(I) if one body corporate manages the other body corporate; or
(II) if one body corporate is a subsidiary of the other body corporate; or
(III) if the bodies corporate are under the same management; or


(IV) if one body corporate exercises control over the other body corporate in any
other manner;
(D) where one undertaking is owned by a body corporate and the other is owned by a firm,
if one or more partners of the firm,––
(I) hold, directly or indirectly, not less than fifty per cent. of the shares, whether
preference or equity, of the body corporate; or
(II) exercise control, directly or indirectly, whether as director or otherwise, over the
body corporate;
(E) if one is owned by a body corporate and the other is owned by a firm having bodies
corporate as its partners, if such bodies corporate are under the same management;
(F) if the undertakings are owned or controlled by the same person or by the same group;
(G) if one is connected with the other either directly or through any number of undertakings
which are inter-connected undertakings within the meaning of one or more of the foregoing
sub clauses.

Explanation I.–– For the purposes of this clause, two bodies corporate shall be deemed to be
under the same management,––
(i) if one such body corporate exercises control over the other or both are under the
control of the same group or any of the constituents of the same group; or
(ii) if the managing director or manager of one such body corporate is the managing
director or manager of the other; or
(iii) if one such body corporate holds not less than one-fourth of the equity shares in
the other or controls the composition of not less than one-fourth of the total
membership of the Board of directors of the other; or
(iv) if one or more directors of one such body corporate constitute, or at any time
within a period of six months immediately preceding the day when the question
arises as to whether such bodies corporate are under the same management,
constituted (whether independently or together with relatives of such directors or
employees of the first mentioned body corporate) one-fourth of the directors of the
other; or
(v) if the same individual or individuals belonging to a group, while holding
(whether by themselves or together with their relatives) not less than one-fourth of
the equity shares in one such body corporate also hold (whether by themselves or
together with their relatives) not less than one-fourth of the equity shares in the
other; or
(vi) if the same body corporate or bodies corporate belonging to a group, holding,
whether independently or along with its or their subsidiary or subsidiaries, not less
than one-fourth of the equity shares in one body corporate, also hold not less than
one-fourth of the equity shares in the other; or
(vii) if not less than one-fourth of the total voting power in relation to each of the two
bodies corporate is exercised or controlled by the same individual (whether
independently or together with his relatives) or the same body corporate (whether
independently or together with its subsidiaries); or
(viii) if not less than one-fourth of the total voting power in relation to each of the
two bodies corporate is exercised or controlled by the same individuals belonging to
a group or by the same bodies corporate belonging to a group, or jointly by such
individual or individuals and one or more of such bodies corporate; or


(ix) if the directors of one such body corporate are accustomed to act in accordance
with the directions or instructions of one or more of the directors of the other, or if
the directors of both the bodies corporate are accustomed to act in accordance with
the directions or instructions of an individual, whether belonging to a group or not.

Explanation II.— If a group exercises control over a body corporate, that body corporate and
every other body corporate, which is a constituent of, or controlled by, the group shall be
deemed to be under the same management.
Explanation III.— If two or more bodies corporate under the same management hold, in the
aggregate, not less than one-fourth equity share capital in any other body corporate, such
other body corporate shall be deemed to be under the same management as the first
mentioned bodies corporate.
Explanation IV.— In determining whether or not two or more bodies corporate are under the
same management, the shares held by financial institutions in such bodies corporate shall
not be taken into account.

Illustration
Undertaking B is inter-connected with undertaking A and undertaking C is inter-connected
with undertaking B. Undertaking C is inter-connected with undertaking A; if undertaking D
is inter-connected with undertaking C, undertaking D will be inter-connected with
undertaking B and consequently with undertaking A; and so on.

Explanation V- For the purposes of this clause, "group" means a group of two or more
individuals, associations of individuals, firms, trusts, trustees or bodies corporate (excluding
financial institutions), or any combination thereof, which exercises, or is established to be in
a position to exercise, control, directly or indirectly, over anybody corporate, firm or trust;
or associated persons.

Explanation VI- For the purposes of this clause,

(I) a group of persons who are able, directly or indirectly, to control the policy of a body
corporate, firm or trust, without having a controlling interest in that body corporate, firm or
trust, shall also be deemed to be in a position to exercise control over it;

(II) "associated persons"—
(a) in relation to a director of a body corporate, means—
(i) a relative of such director, and includes a firm in which such director or
his relative is a partner;
(ii) any trust of which any such director or his relative is a trustee;
(iii) any company of which such director, whether independently or together
with his relatives, constitutes one-fourth of its Board of directors;
(iv) any other body corporate, at any general meeting of which not less than
one-fourth of the total number of directors of such other body corporate are
appointed or controlled by the director of the first mentioned body corporate
or his relative, whether acting singly or jointly;
(b) in relation to the partner of a firm, means a relative of such partner and includes
any other partner of such firm; and


(c) in relation to the trustee of a trust, means any other trustee of such trust;
(III) where any person is an associated person in relation to another, the latter shall also be
deemed to be an associated person in relation to the former;

2. Recovery of duties not levied or not paid or short levied or short paid or erroneously refunded
(Section 11A)

Section 11A is being amended to exclude the period of stay in computing the period of one year or
five years, as the case may be, for issuance of show cause notice where service of notice is stayed by
an order of a court or tribunal.

3. Penalty for short levy or non-levy of duty in certain cases (Section 11AC)

Section 11AC provides for reduced penalty if the duty along with interest is paid within a 30 days
of the communication of the order. It is being amended to make available the benefit of reduced
penalty only if the reduced penalty is also paid within the specified period of thirty days.

4. Power of Arrest, stop, search etc.

Insert the following provisions pertains to powers and duties of officers:
a) Power of search and seizure (Section 12F):
Where the Joint commissioner of Central Excise or Additional Commissioner of Central
Excise or such other Central Excise Officer as may be notified by the Board has reasons to
believe that any goods liable to confiscation or any documents or books or things which in
his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in
any place, he may authorise in writing any Central Excise Officer to search and seize or may
himself search and seize such documents or books or things.
The provisions of the Code of Criminal Procedure, 1973 relating to search and seizure shall,
so far as may be, apply to search and seizure under this section subject to the modification
that subsection (5) of section 165 of the said Code shall have effect as if for the word
"Magistrate", wherever it occurs, the words "Commissioner of Central Excise" were
substituted.

b) Power to Arrest (Section 13):
(1) If an officer of Central Excise empowered in this behalf by general or special order of the
Commissioner of Central Excise has reason to believe that any person has committed an
offence punishable under this Act, he may arrest such person and shall, as soon as may be,
inform him of the grounds for such arrest.
(2) Every person arrested under sub-section (1) for an offence shall, without unnecessary
delay, be taken to a Magistrate.
(3) Where an officer of Central Excise has arrested any person under sub-section (1), for any
offence (other than an offence punishable for a term of imprisonment of three years or more
under section 9), he shall, for the purpose of releasing such person on bail or otherwise,
have the same powers and be subject to the same provisions as the officer-in-charge of a
police station has, and is subject to, under the Code of Criminal Procedure, 1973.


(4) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all
offences under this Act (except an offence punishable for a term of imprisonment of three
years or more under section 9) shall be liable.
(5) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all
offences punishable for a term of imprisonment of three years or more under section 9 shall
be cognizable.

c) Bail for offence punishable for a term of imprisonment of three years or more under section
9 not to be granted without hearing public prosecutor (Section 13A)

(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no
person
Accused of an offence punishable for a term of imprisonment of three years or more under
section 9 shall be released on bail or on his own bond unless—
(i) the public prosecutor has been given an opportunity to oppose the application for
such release; and
(ii) where the public prosecutor opposes the application, the Magistrate is satisfied
that there are reasonable grounds for believing that he is not guilty of such offence
and that he is not likely to commit any offence while on bail:

Provided that a person who is under the age of eighteen years or is a woman or is sick or
infirm, may be released on bail if the Magistrate so directs.

(2) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no police
officer shall, save as otherwise provided under this Act, investigate into an offence under
this Act unless specifically authorised by the Central Government by a general or special
order, and subject to such conditions as may be specified in the order.

d) Searches and arrests how to be made (Section 18)

All searches under this Act or the rules made there under and all arrests under this Act
shall, save as otherwise provided under this Act, be carried out in accordance with the
provisions of the Code of Criminal Procedure, 1973, relating respectively to searches and
arrests under that Code.

C. CENVAT CREDIT RULES, 2004
(1) Amendments in Definitions
(a) Capital goods means:
(A) the following goods, namely:
(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No.
68.04 and sub-heading No. 6805.10 of the First Schedule to the Excise Tariff Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the goods specified at (i) and (ii) above;
(iv) moulds and dies, jigs and fixtures;
(v) refractories and refractory materials;


(vi) tubes and pipes and fittings thereof; and
(vii) storage tank; and
(viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711
and their chassis, but including dumpers and tippers
used—
(1) in the factory of the manufacturer of the final products, but does not include any
equipment or appliance used in an office; or
(1A) outside the factory of the manufacturer of the final products for generation of
electricity for captive use within the factory or
(2) for providing output service;
(B) motor vehicle designed for transportation of goods including their chassis registered in
the name of the service provider, when used for-
(i) providing an output service of renting of such motor vehicle; or
(ii) transportation of inputs and capital goods used for providing an output service;
or
(iii) providing an output service of courier agency”
(C) motor vehicle designed to carry passengers including their chassis, registered in the
name of the provider of service, when used for providing output service of-
(i) transportation of passengers; or
(ii) renting of such motor vehicle; or
(iii) imparting motor driving skills”
(D) components, spares and accessories of motor vehicles which are capital goods for the
assessee;
(b) The definition of “Exempted Services”
Exempted service means a-
(1) taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) service, on which no service tax is leviable under section 66B of the Finance Act; or
(3) taxable service whose part of value is exempted on the condition that no credit of inputs
and input services, used for providing such taxable service, shall be taken; but shall not
include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.’
(c) Definition of Input
For sub clause (B), the following sub-clause shall be substituted, namely:-
Any goods used for -
(a) construction or execution of works contract of a building or a civil structure or a part
thereof; or
(b) laying of foundation or making of structures for support of capital goods, except for the
provision of service portion in the execution of a works contract or construction service as
listed under clause (b) of section 66E of the Act;
(d) Definition of Input Services
Input Service means any service,
— used by a provider of output service for providing an output service; or


— used by the manufacturer, whether directly or indirectly, in or in relation to the
manufacture of final products and clearance of final products upto the place of
removal,
and includes services used in relation to setting up, modernization, renovation or repairs
of a factory, premises of provider of output service or an office relating to such factory or
premises, advertisement or sales promotion, market research, storage upto the place of
removal, procurement of inputs, activities relating to business, such as accounting,
auditing, financing, recruitment and quality control, coaching and training, computer
networking, credit rating, share registry, and security, inward transportation of inputs or
capital goods and outward transportation upto the place of removal but excludes
(A) service portion in the execution of a works contract and construction services including
service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as
specified services) in so far as they are used for -
(a) construction or execution of works thereof; or contract of a building or a civil
structure or a part
(b) laying of foundation or making of structures for support of capital goods, except for
the provision of one or more of the specified services; or;
(B) services provided by way of renting of a motor vehicle in so far as they relate to a motor
vehicle which is not a capital goods or
(BA) service of a general insurance business, servicing, repair and maintenance, in so far as
they relate to a motor vehicle which is not a capital goods, except when used by –
(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactures by
such person; or
(b) an insurance company in respect of a motor vehicle insured or reinsured by such
person or.
(C) such as those provided in relation to outdoor catering, beauty treatment, health and
fitness centre, life insurance, health insurance and travel benefits extended to employees
on vacation such as Leave or Home Travel Concession, when such services are used
primarily for personal or consumption of any employee.
(e) Definition of Output Services
Output service means any service provided by a provider of service located in the taxable territory
but shall not include a service,-
(1) specified in section 66D of the Finance Act; or
(2) where the whole of service tax is liable to be paid by the recipient of service.

2. Cenvat Credit (Rule 3)
(a) Rule 3(1): Duties/taxes in respect of which Cenvat credit is allowed:
(i) for the words, “provider of taxable service”, wherever they occur, the word “provider of output
service” shall be substituted-
(ii) The Cenvat credit of Basic Excise duty is allowed. However, the cenvat credit of such duty shall
not be allowed to be taken when paid on any goods in respect of which the benefit of exemption


under Notification No.1/2011CE dated 1st March 2011 is availed; or specified in serial numbers 67
and 128 in respect of which the benefit of an exemption under Notification No.12/2012 dated 17th
March 2012 is availed;.
(iii)
For Each Quarter At the rate
First year 10%
Second year 8%
Third year 5%
Fourth and fifth year 1%

The Cenvat credit shall also be available in respect of Service tax leviable under section 66B of the
Finance Act.
(b) Rule 3(4): Application and Quantum of Cenvat credit available
An explanation has been inserted by which the Cenvat credit can not be used for payment of
service tax in respect of services where the person liable to pay tax is the services recipient.
(c) Rule 3(5): Reversal of Cenvat Credit where Input and capital goods are removed
The provisions relating to reversal of Cenvat credit on the capital goods after used in the factory are
deleted and substituted for/under Rule 3(5A).
(d) Rule 3(5A): Prior to amendment, this rule specify for reversal of Cenvat credit taken on capital
goods which are cleared as waste or scrap:
But now, if the capital goods, on which CENVAT credit has been taken, are removed after being
used, whether as capital goods or as scrap or waste, the manufacturer or provider of output
services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced
by the percentage points calculated by straight line method as specified below for each quarter of a
year or part thereof from the date of taking the CEVAT Credit, namely:-
(a) for computers and computer peripherals :
(b) for capital goods, other than computers and computer peripherals @ 2.5% for each
quarter.
Provided that if the amount so calculated is less than the amount equal to the duty leviable
on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.
3. Conditions for Allowing CENVAT Credit (Rule 4)
(a) Rule 4(1): the following proviso has been inserted ;
Provided further that the CENVAT credit in respect of inputs may be taken by the provider
of output service when the inputs are delivered to such provider, subject to maintenance of
documentary evidence of delivery and location of the inputs.‖
(b) Rule 4(2): the following proviso has been inserted:
Provided also that the CENVAT credit in respect of capital goods may be taken by the
provider of output service when the capital goods are delivered to such provider, subject to
maintenance of documentary evidence of delivery and location of the capital goods.

4. Refund of Cenvat Credit (Rule 5):
The rule 5 shall be substituted with the following amended Rule:


(1) A manufacturer who clears a final product or an intermediate product for export without
payment of duty under bond or letter of undertaking, or a service provider who provides an
output service which is exported without payment of service tax, shall be allowed refund of
CENVAT credit as determined by the following formula subject to procedure, safeguards,
conditions and limitations, as may be specified by the Board by notification in the Official
Gazette:

Where,-
(A)Refund amount means the maximum refund that is admissible;
(B) Net CENVAT credit means total CENVAT credit availed on inputs and input services by
the manufacturer or the output service provider
reduced by the amount reversed in terms of sub-rule (5C) of rule 3, during the relevant
period;
(C) Export turnover of goods‖ means the value of final products and intermediate products
cleared during the relevant period and exported without payment of Central Excise duty
under bond or letter of undertaking;
(D) Export turnover of services‖ means the value of the export service calculated in the
following manner, namely:-
Export turnover of services = payments received during the relevant period for export
services + export services whose provision has been completed for which payment had been
received in advance in any period prior to the relevant period – advances received for
export services for which the provision of service has not been completed during the
relevant period;
(E) Total turnover‖ means sum total of the value of -
(a) all excisable goods cleared during the relevant period including exempted goods,
dutiable goods and excisable goods exported;
(b) export turnover of services determined in terms of clause (D) of sub-rule (1)
above and the value of all other services, during the relevant period; and
(c) all inputs removed as such under sub-rule (5) of rule 3 against an invoice, during
the period for which the claim is filed.

(2) This rule shall apply to exports made on or after the 1st April, 2012:

Provided that the refund may be claimed under this rule, as existing, prior to the
commencement of the CENVAT Credit (Third Amendment) Rules, 2012, within a period of
one year from such commencement:

Provided further that no refund of credit shall be allowed if the manufacturer or provider of
output service avails of drawback allowed under the Customs and Central Excise Duties
and Service Tax Drawback Rules, 1995, or claims rebate of duty under the Central Excise


Rules, 2002, in respect of such duty; or claims rebate of service tax under the Export of
Services Rules, 2005 in respect of such tax.

Explanation 1 - For the purposes of this rule,-
(1) export service‖ means a service which is provided as per the provisions of Export of Services
Rules, 2005, whether the payment is received or not;
(2) relevant period‖ means the period for which the claim is filed.

Explanation 2 -For the purposes of this rule, the value of services, shall be determined in the same
manner as the value for the purposes of sub-rule (3) and (3A) of rule 6 is determined.

5. Refund of CENVAT credit to service providers providing services taxed on reverse charge
basis: (Rule 5B)
After rule 5A, the above rule shall be inserted, namely:-
A provider of service providing services notified under sub-section (2) of section 68 of the Finance
Act and being unable to utilise the CENVAT credit availed on inputs and input services for
payment of service tax on such output services, shall be allowed refund of such unutilised
CENVAT credit subject to procedure, safeguards, conditions and limitations, as may be specified
by the Board by notification in the Official Gazette.

6. Obligation of a manufacturer or producer of final products and a provider of Output services
(Rule 6)
(i) in the marginal heading, for the words “ provider of taxable service” the words, “ provider of
output service” shall be substituted;
(ii) in sub-rule (3), after the second proviso, the following proviso shall be inserted, namely:-
“Provided that in case of transportation of goods or passengers by rail the amount required to be
paid under clause (i) shall be an amount equal to 2 per cent of value of the exempted services.”
(iii) in sub-rule (3A), in clauses (a), (b), (c) and (h), for the words “taxable” wherever they occur, the
words, “output” shall be substituted;
(iv) in sub-rule 3(B), for the words, brackets, letters and figures “providing taxable service specified
in sub-clause (zm) of clause (105) of section 65 of the Finance Act” the words, “engaged in
providing services by way of extending deposits, loans or advances” shall be substituted;
(v) in sub-rule 3(D), for the Explanation I, the following Explanation shall be substituted, namely:-

“Explanation I. - “Value” for the purpose of sub-rules (3) and (3A),—
(a) shall have the same meaning as assigned to it under section 67 of the Finance Act,
read with rules made thereunder or, as the case may be, the value determined under
section 3, 4 or 4A of the Excise Act, read with rules made thereunder;
(b) in the case of a taxable service, when the option available under sub-rules
(7),(7A),(7B) or (7C) of rule 6 of the Service Tax Rules, 1994, has been availed, shall be
the value on which the rate of service tax under section 66B of the Finance Act, read
with an exemption notification, if any, relating to such rate, when applied for


calculation of service tax results in the same amount of tax as calculated under the
option availed; or
(c) in case of trading, shall be the difference between the sale price and the cost of goods
sold (determined as per the generally accepted accounting principles without
including the expenses incurred towards their purchase) or ten per cent of the cost of
goods sold, whichever is more.
(d) in case of trading of securities, shall be the difference between the sale price and the
purchase price of the securities traded or one per cent of the purchase price of the
securities traded, whichever is more.
(e) shall not include the value of services by way of extending deposits, loans or
advances in so far as the consideration is represented by way of interest or
discount;”

(vi) after sub-rule (6A), the following sub-rules (7) & (8) shall be inserted, namely:-
The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the taxable
services are provided, without payment of service tax, to a unit in a Special Economic Zone
or to a developer of a Special Economic Zone for their authorised operations or when a
service is exported,

For the purpose of this rule, a service provided or agreed to be provided shall not be an
exempted service when:-
(a) the service satisfies the conditions specified under rule 6A of the Service Tax
Rules, 1994 and the payment for the service is to be received in convertible foreign
currency; and
(b) such payment has not been received for a period of six months or such extended
period as maybe allowed from time-to-time by the Reserve Bank of India, from the
date of provision.”
7. Manner of distribution of credit by input service distributor:
The input service distributor may distribute the CENVAT credit in respect of the service tax paid
on the input service to its manufacturing units or units providing output service, subject to the
following conditions, namely:—

(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of
service tax paid thereon;

(b) credit of service tax attributable to service used in a unit exclusively engaged in manufacture of
exempted goods or providing of exempted services shall not be distributed;

(c) credit of service tax attributable to service used wholly in a unit shall be distributed only to that
unit; and


(d) credit of service tax attributable to service used in more than one unit shall be distributed
prorata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the
units to which the service relates.

Explanation 1.- For the purposes of this rule, ―unit‖ includes the premises of a provider of output
service and the premises of a manufacturer including the factory, whether registered or otherwise.
Explanation 2.- For the purposes of this rule, the total turnover shall be determined in the same
manner as determined under rule 5.

D. CUSTOM DUTY (CUSTOMS ACT, 1962)

1. Recovery of duties in certain cases (Section 28AAA):

(1) Where an instrument issued to a person has been obtained by him by means of—
(a) collusion; or
(b) wilful misstatement; or
(c) suppression of facts,
for the purposes of this Act or the Foreign Trade (Development and Regulation) Act, 1992, by such
person or his agent or employee and such instrument is utilised under the provisions of this Act or
the rules made or notifications issued thereunder, by a person other than the person to whom the
instrument was issued, the duty relatable to such utilisation of instrument shall be deemed never
to have been exempted or debited and such duty shall be recovered from the person to whom the
said instrument was issued:

Provided that the action relating to recovery of duty under this section against the person to
whom the instrument was issued shall be without prejudice to an action against the importer
under section 28.

Explanation 1.— For the purposes of this sub-section, "instrument" means any scrip or
authorisation or licence or certificate or such other document, by whatever name called, issued
under the Foreign Trade (Development and Regulation) Act, 1992, with respect to a reward or
incentive scheme or duty exemption scheme or duty remission scheme or such other scheme
bestowing financial or fiscal benefits, which may be utilised under the provisions of this Act or the
rules made or notifications issued thereunder.

Explanation 2.––The provisions of this sub-section shall apply to any utilisation of instrument so
obtained by the person referred to in this sub-section on or after the date on which the Finance Bill,
2012 receives the assent of the President, whether or not such instrument is issued to him prior to
the date of the assent.

(2) Where the duty becomes recoverable in accordance with the provisions of sub-section (1), the
person from whom such duty is to be recovered, shall, in addition to such duty, be liable to pay
interest at the rate fixed by the Central Government under section 28 AA and the amount of such
interest shall be calculated for the period beginning from the date of utilisation of the instrument
till the date of recovery of such duty.


(3) For the purposes of recovery under sub-section (2), the proper officer shall serve notice on the
person to whom the instrument was issued requiring him to show cause, within a period of thirty
days from the date of receipt of the notice, as to why the amount specified in the notice (excluding
the interest) should not be recovered from him, and after giving that person an opportunity of
being heard, and after considering the representation, if any, made by such person, determine the
amount of duty or interest or both to be recovered from such person, not being in excess of the
amount specified in the notice, and pass order to recover the amount of duty or interest or both
and the person to whom the instrument was issued shall repay the amount so specified in the
notice within a period of thirty days from the date of receipt of the said order, along with the
interest due on such amount, whether or not the amount of interest is specified separately.

(4) Where an order determining the duty has been passed under section 28, no order to recover
that duty shall be passed under this section.

(5) Where the person referred to in sub-section (3) fails to repay the amount within the period of
thirty days specified therein, it shall be recovered in the manner laid down in sub-section (1) of
section 142.

2. Bail not to be granted in certain cases without hearing public prosecutor Section 104A

A new section 104A has been inserted as follows:

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no person accused
of an offence punishable for a term of imprisonment of three years or more under section 135 shall
be released on bail or on his own bond unless—

(i) The public prosecutor has been given an opportunity to oppose the application for such
release; and

(ii) where the public prosecutor opposes the application, the Magistrate is satisfied that
there are reasonable grounds for believing that he is not guilty of such offence and that he is
not likely to commit any offence while on bail: Provided that a person who is under the age
of eighteen years or is a woman or is sick or infirm, may be released on bail if the Magistrate
so directs.

(2) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no police officer
shall, save as otherwise provided under this Act, investigate into an offence under this Act unless
specifically authorized by the Central Government by a general or special order, and subject to such
conditions as may be specified in the order.''.

3. Offences to be tried summarily in certain cases

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, an offence under
this Chapter (other than the offence punishable for a term of imprisonment of three years or more
under section 135) may be tried summarily by a Magistrate." (Section 138)


4. Special provisions exempting additional duty of customs on import of foreign-going vessels
into India
For the period starting 17th March, 2012, full exemption from additional duty has been provided to
“foreign-going vessels” imported into India but on the fulfillment of certain conditions viz that a
Bill of entry shall be filed for the vessel when it converts into a “coastal” vessel and additional duty
would be payable on the following basis:
(i) if the licence obtained for coastal trade at the time of conversion is a general one i.e.
without specified period of validity, duty would be payable as if there were no exemption;
(ii) if the licence for coastal trade is for a specified period , and

(a) import is by the owner of the vessel or his agent, then 1/120th part of the aggregate duty would
be payable on the vessel for each month (or part thereof) of stay in India as a coastal vessel; or
(b) if the import is against a lease agreement/ contract, then duty shall be payable on the lease
value of the contract.

Illustration I: If a vessel imported by a Shipping Line ABC Company as a foreign-going vessel
converts into a coastal vessel for 6 months and the value of the vessel declared by the importer is
Rs. 2 crore, the duty payable would be calculated in the following manner:
(2*0.0618) * 6/120 = ` 61,800, where the rate of duty is 6.18%

Illustration II: If a vessel is imported by an Indian corporate on lease basis for use after import on
payment of a total rental of Rs. 50 lakh for a period of 3 months, the duty payable would be
calculated in the following manner:
50* 0.618 = Rs. 3.09 lakh, where the rate of duty is 6.18%

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Tax updates for december 2012 exams

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