Whether Service tax applicable on recovery of capital expenditure??

[Jhanvi Jansari]

Hello sir/ma'am,
Earlier, a scheme on Critical Infrastructure Development Project was implemented by Gujarat Government on PPP mode. In this scheme, fund was contributed by 60% State Govt. 20% by GIDC and remaining 20% by industry/people. (PPP mode)

Now, for the 20% portion contributed by GIDC, GIDC wants to recover it from industries. It is charging Rs.5 per sq. mtr. space occupied by each industry.
In this Rs.5/-; Rs.3/- is amount of recovery and Rs.2/- is charged towards maintenace charges. GIDC provides bill inclusive of Rs. 3/- towards recovery and charges service tax on total Rs. 5/- inclusive of Rs.3/-. Is service tax leviable on recovery of rs.3/-? if not, please provide any judgement justifying the same.

Thanking you in advance. :):)

[CASeetharaman KC]

If the ownership of the 20% is transferred to the private party after the repayment of 20% contributed by GIDC is completed then this is a hire purchase transaction on which service tax would be leviable

[Jhanvi Jansari]

Thank You very much sir.

The critical infrastructure project scheme was for development of overall infrastructure of GIDC estates. For example, road development. The ownership lies with GIDC only.

Also, the GIDC's bill of maintenance does not bifurcate, the amount towards recovery (Rs. 3/-) and the amount towards maintenance (Rs. 2/-). Now, the only question arises is whether the contribution of GIDC towards the scheme (Rs. 3/-) should be considered as capital expenditure and whether service tax will be chargeable on its recovery??

Sir, I humbly request to provide judgement, if any, for similar matter.

THANK YOU AGAIN FOR YOUR KIND SUPPORT...

 

[dipsang vadhel]

What goes in to consideration of servoce depends upon understanding of the parties.

Here GIDC is providing services of maintaining common facilities to units located in estate. Henec, it is service  by GIDC to units. GIDC is charging Rs.5 for maintaining common facilities for units. The amount of Rs.5 has been worked out based on (i) amount incurred by GIDC on any perticular Critical Infrastructure Development Project (ii)routine Maintance expenses and (iii) space occupied by units.Thus,  the amount of consideration may or may be without profit and depend upon understanding of the parties.

To make my point more clear, Suppose in manufacturing plant some bye product/ waste is generated e.g. Fly ash. Manufaturer need to install machine to collect this Fly Ash so that it can be sold in the market. For such sale of fly ash, manufacturee is charging amount of Rs. 15 (e.g.) considering (i) the cost of installing machine (ii) quantity of Fly ash being generated (3) sale price of fly ash Rs.5 . Now, such amount of Rs.10 can not be termed  as recovery of machine cost incurred. It is indeed receipt of sale price. I can not escape from sales Tax liability on such sale price of Rs.10 by saying that it is toward recovery of Machine cost and real sle price is Rs.5 only.

It is to be noted that in commercial transaction, you are always charging to your customer for your cost+ Profit. It does not mean that you can take away for expenses by terming it as recovery of expense and pay excise duty/sales tax/Vat on balance price only. Even if some portion of price is for recovery of your expense, still it is slae price/consideration.

Such understanding has no impact on taxation of Service of maintaing common facilities provided by GIDc to units located in Estate. Therefore, service Tax will be on Rs.5 even if Rs.3 is towards recovery of expenses incurred by GIDC on Critical Infrastructure Development Project.  It is  still service and taxable if otherwise not covered in negative list or exemption.

AI Summary

Service tax on recovery of capital expenditure is treated as consideration for maintenance services and thus taxable.
If ownership of infrastructure remains with the authority and it charges a composite fee for upkeep and cost recovery, the entire fee is consideration for a maintenance service; merely labelling part as recovery of capital expenditure does not exclude that part from service tax liability. If ownership is transferred after repayment, the transaction may assume a hire purchase character attracting service tax applicable to such transfers.