January 2016

Volume I
Service Tax Updates (STU)

MyGst.MyTax

Contents:
Latest Case Laws:

Adopt
same
yardstick
for
establishing nexus between input
and output service for deciding
availability of cenvat credit or refund
of credit. Pipavav Shipyard Ltd v/s
Commissioner of Central Excise,
Bhavnagar 2016 (41) STR 151
(Tri-Ahmedabad).
No service tax to be levied where an
activity has been undertaken in
India but the ultimate purpose is for
rendering service outside India.
International Overseas Services v/s
Commissioner of Service Tax,
Mumbai 2016(41) STR 230 (TriMumbai).
No Input Tax Credit available where
nexus between input and output is
not proved, even if the input services
is received by the service provider
himself. Kilburn Chemicals Ltd. v/s
Commissioner of Central Excise,
Tirunelveli 2016 (41) STR 131 (TriChennai)

Even if input service is received at

premises other than from where
output service is executed, taxpayer
can claim refund of the same. Exfo
Electro-Optical Engineering (P)
Ltd v/s Comissioner of Central
Excise, Pune 2016 (41) STR 65
(Tri-Mumbai).

Where the taxpayer has obtained

registration under Service Tax, plea

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of being unaware of tax payment or

filing of return will not tantamount
reasonable cause under section 80 of
Finance Act 1994. Midas Events v/s
Commissioner of Service Tax,
Mumbai 2016 (41) STR 233
(Tri- Mumbai).
Articles:

Applicability of Service Tax on Penal

Charges.

Editors Pick:

No Service Tax can be charged on

undecided amount received by
service
provider.
Facinate
Advertising & Marketing v/s
Commissioner Central Excise,
Chandigarh 2013 (31) STR 77 (TriDelhi).

No Separate Books of Accounts

under Rule 6 is to be maintained
where the assessee is providing
output service and doing other
activities which is neither service
nor manufacture. Krishna Auto
Sales v/s Commissioner Central
Excise, Chandigarh 2015(40) STR
1121 (Tri- Delhi)

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January 2016
Volume I
Service Tax Updates (STU)

Latest Case Laws:

Pipavav Shipyard Limited:
It was the case of 100% Export Oriented
Unit (EOU) where service tax department
held that the phrases used in Cenvat Credit
Rules, permitted credit on services used
whether directly or indirectly, in or relation
to the manufacture of final product or for
providing output service. The field
information which tends to take a view that
for eligibility of refund, the nexus between
input/input services and the final
product/services has to be closer and more
direct than that is required for taking credit.
The Bench held that as regards the extent of
nexus, it must be borne in mind that the
purpose is to refund the credit that has
already been taken. There cannot be
different yardstick for establishing the
nexus between taking of the credit and for
refund of credit. Even if different phrases are
used under different rules of Cenvat Credit
Rules, they have to be read in a harmonious
manner.
International Overseas Services:
It was a case of Manpower Recruitment
Agency wherein the Agency was recruiting
the employees in India on behalf of the
overseas company situated outside India. It
was found that the employees were
recruited by the appellant for clients abroad
for working, salaries are paid by the clients
of the appellant and the services of the
appellant was engaged by the foreign clients
for identifying the potential employees who
can work abroad. It is to be seen that
though the services of the appellant was
carried out in India, but the ultimate
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purpose of recruitment was for working

abroad and not in India. This as per the
considered view of the bench fell under the
ambit of export of service and hence no
service tax could be charged on the same.
Kilburn Chemicals Limited:
It was recorded that the appellant claims
Cenvat Credit on Security Services rendered
at the Guest House of the appellant situated
in Kolkata and Erection and Commissioning
Services of the two Wind Turbine
Generators situated in Sankran Koil Taluk
and Tirunelveli Taluk. Recording that these
services were no way connected with the
manufacture of the final product of the
appellant in respect of the factory situated
in Tuticorin, the authorities disallowed the
service tax paid on such services. So far as
the Cenvat Credit on Security Services on
Guest House is concerned that is no way
related to manufacture, for which, assessee
shall not get the Cenvat Credit thereon. So
far as erection and construction services are
concerned, that has direct bearing on the
power generation. Even though the power
generated at a place was availed to use the
same in manufacture, which establishes a
vital link between input/input service used
and manufactured. Accordingly, appellant is
entitled to the Cenvat Credit on the
Erection and Commissioning Services
availed.
Exfo Electro-Optical (P) Ltd.
The only dispute in this case was regarding
the services rendered by the service provider
is in the premises for which registration was
not granted to the appellant. It was seen
from the records that the appellant has
specifically pleaded before the lower
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January 2016
Volume I
Service Tax Updates (STU)

authorities that the output services which

are provided by them is from their
registered premises and that has got
centralized
accounting
system.
Subsequently, it was found that the
appellant has registered or added the
addresses from wherein the services were
received for providing export services; in the
registration certificate, which is an
indication that the appellant is eligible to
avail input service credit and having
exported the services is eligible for the
refund of the amount lying unutilized.
Midas Events:
On the issue of extended time period and
penalty, we note that the appellant was very
well aware of their responsibility and
liability, having taken service tax
registration in Feb 2003. But the appellant
still chose to avoid all Legal obligations cast
on them after taking registration and not
complying with the requirement of filing
ST-3 returns on periodical basis for a long
period of time. Considering that the
appellant had service tax registration but
did not receive the show cause notice
(SCN), did not submit reply to SCN, did not
even appear for personal hearings on various
dates can only lead to conclusion that their
intentions were not bonafide. It is certainly
not a case for waiver of penalties u/s 80 of
the Finance Act. Penalty may not be
imposed in terms of Section 80 if the
assessee proves that there was reasonable
cause for failure to pay service tax and file
returns. No reasonable cause whatsoever
has been shown to us to deserve the benefit
of Section 80.

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Articles:
Applicability of Service Tax on Penal
Charges.
Service Tax is an indirect tax which is levied
on consumption of service provided by
service provider to the service recipient. In
order to charge service tax we first need to
analyze the meaning of term service under
Finance Act 1994 in order to establish as to
when and how the service tax has to be
levied. As per Section 65B (44) of Finance
Act 1994 Service means any activity carried out
by a person for another for a consideration and
includes a declared service but shall not
include.. Therefore on plain reading of
the section it is evidently clear that to
charge service tax it there must be some sort
of activity involved.
As per:
1. Blacks Law Dictionary activity means
work performed to create a result;
2. Merriam Webster activity means
state of being active, something that
is done as work ;
3. Business Dictionary.com activity
means measurable amount of work
performed;
4. Oxford Dictionary activity means the
condition in which things are
happening or being done.
Upon analyzing the meaning of activity
from all prospective it is vitally clear that it
must involve an active action which could
be measured in terms of work performed
and create a result. Any participation which
is of passive nature shall not be covered
under the term activity. Therefore such work
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January 2016
Volume I
Service Tax Updates (STU)

which does not qualify as an activity shall

not be termed as service defined by
Section 65B(44) of the Finance Act 1994.
The penal charges levied by the
service provider are the result of the
violation of a particular contract or non
fulfillment of vested responsibilities by the
service recipient. By any stretch of
imagination it cannot be established that
such penal charges have been collected out
of an activity provided or agreed to be
provided by the service provider (SP). It is
penal action which has been taken by the SP
which in no manner could be co-related
with the consideration of the actual service
provided or agreed to be provided by him.
And in cases of penal charges, no activity is
performed and hence there arises no
question of service tax being charged in this
regards.
CBEC had released various circulars
which substantiate our view. Vide its
Circular No 96/7/2007 dated 23-08-2007
CBEC had made it clear that amount
collected for delayed payment of telephone
bill is not to be treated as consideration
charged for provision of telecom service and
therefore does not form a part of the value of
taxable service under section 67 read with
Service Tax (Determination of Value) Rules,
2006. Again vide Circular No: 121/02/2010
ST dated 26.04.2010 it has been clarified
that detention charges in respect of
detained containers are not in respect of
service provided on behalf of client and such
charges must be called Penal Rent and
hence it is not chargeable to service tax.
More so adopting the same analogy CBEC
had clarified vide F No: 137/25/2011- ST
dated 03-08-2011 that delayed payment
charges received by the stock brokers are
also therefore not includible in taxable value
as the same are not the charges for providing
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taxable service. Such charges are on account

of delay in making payments by the service
recipient to the service provider and are in
the nature of penal charges for not making
payment within stipulated time. Further
CBEC did not restrict this principle to stock
brokers, it has categorically mention that
same principle shall be applied to other
services as well provided that the amount
recovered towards penal charges should be
separately mentioned in the invoice. In case
the penal charges are not mentioned
separately, only then these would be
covered by gross amount charged by the
service provider otherwise by no means
service tax can be charged on penal charges.
Further as per Section 67 of Finance
Act what is chargeable to service tax is the
gross amount charged for the provision of
service and hence in order to establish that
it is necessary that first an activity should
qualify as a service and then the role of
section 67 shall come into ambit.
Also as per 66E of the Act wherein
some activities have been categorically
covered under the definition of Declared
Service the activities which includes
agreeing to the obligation to refrain from an
act, or to tolerate an act or a situation, or to
do an act is covered. It is to be noticed that
in order to qualify any activity under this
entry there must be an agreement which is
entered into by both the parties in order to
refrain from the act. It is important that the
very motive of this agreement should be to
refrain or conduct any activities mentioned
under this entry. Any penal charges which
are charged due to violation of any other
agreement shall not qualify under such
entry. More so merely refraining from an act
without agreeing to refrain has also been
kept out of the ambit of this entry. For
instance, if a contractor delays the
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January 2016
Volume I
Service Tax Updates (STU)

construction of a project and some penalties

are recovered from him, it does not mean
that the company has agreed to tolerate the
delay and the penalties recovered is
consideration for said toleration of act. It
has also been established that any amount
received in settlement of dispute cannot be
considered as a service liable to service
tax.
From the above discussion it is clear
that since penal charges does not qualify as
consideration for service and also they do
not fall under declared Services, no service
tax can be charged/recovered on the penal
charges made by the service provider.
Editors Pick:

MyGst.MyTax

required to maintain separate accounts only

in respect of exempted services and dutiable
service. Since prior to 01.04.2011 trading
activity was not at all a service and hence
the appellant was not required to maintain
separate books of accounts. The view of the
department that the appellant is not
entitled to credit for want of maintaining of
separate accounts is not correct. At the
same time, credit cannot be allowed against
trading as it is neither a service nor
manufacture. Therefore that portion of the
input service availed for trading is not
admissible. The question as to how to derive
at that portion of input service has been
dealt in the case of Orion Appliances Ltd.
v/s Commissioner of Service Tax 2010 (19)
STR 205 (Tri-Ahmedabad) .

Facinate Advertising & Marketing:

Delhi bench of CESTAT held that incentive
is a receipt for appreciation of performance
of services provided. How such forms part
of taxable service remains unexplained. We
are unable to find how the revenue shall
succeed saying that incentive shall be
brought to tax when such incentive
whether shall be payable was not known to
the respondent while providing service.
Therefore, the dispute on that count is
resolved against the revenue. Therefore it is
held that any consideration which is not pre
determined shall not be charged to service
tax.
Krishna Auto Sales
The assessee was using common input
services for trading activity as well as for
other output services. Delhi Bench of
CESTAT held that as per Rule 6(2) of
Cenvat Credit Rules, 2004, the assessee is
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