TaxTMI 
TaxTMI 
Comptroller and Auditor General of India's Report on Indirect Taxes - Service Tax Compliance Audit for 2007-08 (Extracts) Year
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.... No. of services subjected to service tax Budget estimates Revised budget estimates Actual receipts* Difference between actual receipts and budget estimates Percentage variation 2003-04 58 8,000 8,300 7,890 (-) 110 (-) 1.38 2004-2005 71 14,150 14,150 14,199 49 0.35 2005-2006 81 17,500 23,000 23,055 5,555 31.73 2006-2007 97 34,500 38,169 37,598 3,098 8.98 2007-2008 104 50,200 50,603 51,301 1,101 2.19 * Figures as per Finance Accounts 9.3 Outstanding demands The number of cases and amount involved in demands for service tax outstanding* for adjudication/recovery as on 31 March 2008 are mentioned in the-following table :- TABLE NO.2 (Amounts in crore of rupees) Pending decision with As on 31 March 2007 As on 31 March 2008 Number of cases Amount Number of cases Amount More than five years Less than five years More than five years Less than five years More than five years Less than five years More than five years Less than five years Adjudicating officers ....
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....he penalty of Rs. 244.66 crore that was imposed, the department could recover only Rs. 6.04 crore (2.47 per cent). 9.5 Contents This section contains 158 paragraphs featured individually or grouped together with a revenue implication of Rs. 276.72 crore. The Ministry/department had accepted (till December 2008) audit observations in 112 paragraphs involving Rs. 47.43 crore and had recovered Rs. 23.22 crore. 9.6 Impact of audit reports 9.6.1 Revenue impact During the last five years (including the current years report), audit through its audit reports had pointed out short levy and other deficiencies with revenue implication of Rs. 726.34 crore in 434 audit paragraphs. Of these, the Government had accepted audit observations in 329 audit paragraphs involving Rs. 195.90 crore and had since recovered Rs. 63.92 crore. The details are shown in the following table :- TABLE NO.4 (Amounts in crore of rupees) Year of Audit Report Paragraph included Paragraphs accepted Recoveries effected Pre printing Post printing Total Pre printing Post printing Total No. Amount No. Amount No. Amount No. Amount ....
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....it Rules, 2004. Under Cenvat Credit Rules, the credit availed can be utilised for payment of central excise duty on finished goods or service tax payable on output services subject to fulfilment of certain conditions. A few cases of incorrect grant of cenvat credit involving tax of Rs. 177.55 crore, noticed in test check are described in the following paragraphs. Many of these observations relate to companies providing cellular services to public. These observations were communicated to the Ministry through 71 draft audit paragraphs. The Ministry/department had accepted (till December 2008) the audit observations in 43 draft audit paragraphs with money value of Rs. 14.56 crore of which Rs. 4.71 crore had been recovered. 10.1 Utilisation of Cenvat credit not restricted to prescribed limits Rule 3 of the Cenvat Credit Rules, 2004, allows a provider of taxable service to take credit of specified duties and service tax paid on any input, input service or capital goods received in the premises of the provider of output service on or after 10th day of September 2004. Further, rule 6(3) of the, Cenvat Credit Rules 2004, provides that where a provider of output service avails of cenv....
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....s. 15.67 crore. However, the assessees had utilised credit of Rs. 59.21 crore resulting in excess utilisation of cenvat credit by Rs. 43.54 crore. The observation was pointed out to the department/Ministry between December 2007 and May 2008; its reply had not been received (December 2003). 10.1.3 M/s. Vodafone Essar South Ltd., Chennai (previously M/s. Hutchison Essar South Ltd.), in Chennai commissionerate, engaged in providing telephone service using common input services for taxable as well as exempted services, did not restrict utilisation of the cenvat credit to 20 per cent as envisaged in the foregoing rule. On this being pointed out by the department (September 2005), the assessee paid (December 2005) Rs. 34.89 lakh along with interest towards the excess utilisation of input credit for the period from September 2004 to May 2005. Verification of records by audit revealed that the service tax payable for, the said period was Rs. 7.22 crore and after restriction of the utilisation of credit to 20 per cent, the tax payable in cash was Rs. 5.78 crore, whereas the amount paid in cash (including Rs. 84.89 lakh demanded and paid subsequently) was Ba 4.65 crore. This resulted i....
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....ods) and deposited balance of Rs. 32.49 crore in cash. This resulted in excess utiisation of cenvat credit of Rs. 13.42 crore (Rs. 24.89 crore minus Rs. 11.47 crore) which was required to be recovered along with interest. On this being pointed out (November 2007), the department stated (May 2008) that cenvat credit on capital goods was not covered under the 20 per cent limit. The reply of the department was not relevant because under Rule 6(3)(c) of the Cenvat Credit Rules 2004, the provider of output service was required to utilise credit only to the extent of an amount not exceeding 20 per cent of the amount of service tax payable on taxable output service. Reply of the Ministry had not been received (December 2008). 10.1.5 M/s. Bharti Airtel Ltd., (formerly known as Bharti Infotech Ltd.), Bhopal, in Bhopal commissionerate, engaged in providing telephone and leased circuit services, availed of cenvat credit on inputs, capital goods and input services used for providing taxable as well as exempted services. The assessee, however, utilised cenvat credit exceeding 20 per cent of their tax liability towards taxable output service which was incorrect. This resulted in exce....
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....he department stated (March 2008) that the ceiling limits prescribed in the rules do not apply to capital goods credit and hence capital goods credit in its entirety was available for utilisation to the assessee. After setting off the excess utilised amounts against short utilisation during subsequent months including capital goods credit, interest to the extent of Rs. 0.47 lakh was recovered for the period of delay in adjustment. The reply of the department was not relevant as rule 6(3)(c) imposed restriction on the utilisation of cenvat credit with reference to the tax liability of output service which represents not only inputs/input service credit but also credit earned on capital goods. The adjustments allowed by the department between excess utilisation in a month against short utilisation during subsequent month by including the entire amount of capital goods credit was not correct as such an arrangement was not contemplated in the Rules and hence the entire excess credit of Rs. 1.20 crore needs to be recovered along with interest and penalty. Reply of the Ministry had not been received (December 2008). 10.1.8 M/s. Idea Celluar Ltd., in Hyderabad-II commissionerate,....
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....Guntur (1), Hyderabad-I (3), Haldia (1), Jaipur-II (1), Kolkata-VI (1), Madurai (1), Mumbai-II (1), Mumbai-III (1), Nagpur (5), Pama (1), Pune-III (1), Salem (2), Surat-II (4), Thane-I (3), Trichy (2), Tirunaveli (1) and Vadodara (1) commissionerates, engaged in manufacture of various excisable goods availed cenvat credit of service tax paid on transportation of goods from the factory gate to the customer's premises or from the depot to the customer's premises. However, cenvat credit was also availed of on the service tax paid on outward transportation of the goods exported beyond the place of removal. Availing of cenvat credit was not correct as the sales in these cases were effected at the factory gate or depot. This resulted in incorrect availing of Cenvat credit of Rs. 11.27 crore between January 2005 and August 2007. This was recoverable with interest and penalty. On this being pointed out (between April 2005 and March 2008), the Ministry admitted audit observations in sixteen cases and stated (between June and September 2008) that tax of Rs. 85.37 lakh and interest of Rs. 15.28 lakh had been recovered from seven assessees. It further stated that demand for Rs. 1.80 crore i....
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.... paid on input services used for IT services. The credit attributable to such ineligible IT services for the period 2004-05 to 2006-07 worked out to Rs. 8.81 crore. On this being pointed out (December 2007), the department stated (March 2008) that a service provider who provided both taxable services and non-taxable services (i.e. not covered under service tax act) was not prohibited from availing full credit on common inputs/input services if the utilisation of credit was limited to 20 per cent of the tax payable as laid down in rule 6(3)(c) of the Cenvat Credit Rules. It also argued that availing of credit on common input goods/input services used in software development services for home consumption/export was permissible under cenvat provisions since these input services were not utilised exclusively for such exempted services. The reply of the department was not acceptable as the enabling provisions contained in section 94(2)(ccc) of the Finance Act, 1994 / section 37(2)(xvia) of the Central Excise Act, 1944, under which cenvat credit rules were framed, limit the scope of cenvat benefits only to taxable services and not to services which are outside the purview of the Fi....
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....ten off unrealised amount of service charges of Rs. 124.76 crore pertaining to the period from April 2004 to March 2007. The corresponding cenvat credit of Rs. 2.60 crore, attributable to input services against the above write off was not paid back even though the services to that extent did not suffer service tax. On this being pointed out (between October 2007/May 2008), the department in respect of assessees in Hyderabad-II commissionerate stated (February/March 2008) that as per rule 3(5B) of the Cenvat Credit Rules, reversal of credit was warranted only when inputs or capital goods were written off fully before being put to use, whereas the input services in the instant cases were already consumed in taxable services and input services, unlike inputs or capital goods being intangible, reversal provisions were not applicable to these. The department in respect of assessees in Cochin comniissionerate stated (July 2008) that the restriction of utilisation of cenvat credit was applicable only if the final service was exempt. The reply of the department was not acceptable as cases of write off of output services could not be dealt with differently either because the input ser....
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....on behalf of the company. The assessee had also utilised the credit so taken, incorrectly. This resulted in incorrect availing of input service credit of Rs. 1.47 crore during the period from July 2005 to October 2006. On this being pointed out (December 2006), the department admitted the audit observation and intimated (August 2007) that a demand for Rs. 2.05 crore had been issued covering the period from April 2004 to March 2007. Further developments in the case had not been intimated (December 2008). Reply of the Ministry had not been received (December 2008). 10.5.2 M/s. Bharti Hexacon Ltd., in Jaipur-I commissionerate, engaged in the activity of providing cellular phone service, availed of cenvat credit of service tax of Rs. 99.98 lakh on the basis of debit notes issued in favour of the assessee for call site sharing expenses and leasing bandwidth on different routes in Rajasthan. The availing of service tax credit on the basis of debit notes was incorrect as the same were not specified documents for availing of credit of service tax. On this being pointed out (October 2007 and February 2008), the department stated (April 2008) that the assessee had taken credit on....
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....confirmation of demands of Rs. 22.71 lakh and issue of show cause notice for Rs. 7.53 lakh. Reply in the remaining two cases had not been received (December 2008). 10.6.2 The Board clarified on 17 March 2006 that service tax paid on erection and commissioning and maintenance of wind mill is not eligible for cenvat credit as no nexus exists between wind mill and production process, where wind mills are located outside the factory premises. M/s. Ashok Leyland Ltd., in Chennai-I commissionerate, engaged in the manufacture of motor vehicle chassis, paid leasing rentals for the windmills, situated in Coimbatore and Tirunelveli districts and operation and maintenance charges for the wind farm located at Gudimangalam in Coimbatore district. The assessee paid service tax of Rs. 50.48 lakh during the period 2006-07 on lease rentals, operation and maintenance charges, and availed cenvat credit, which was not correct. On this being pointed out (September, October and November 2007), the Ministry admitted the audit observation and reported (June 2008) that show cause notice for Rs. 50.48 lakh had been issued. 10.7 Cenvat credit utilised for payment of tax on input services Rule ....
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....akh. On this being pointed out (February and March 2006), the department while admitting the audit observation (April and October 2006) stated that the inadmissible credit worked out to Rs. 1.15 crore which had been recovered in December 2006. Report on recovery of interest had not been received (April 2008). Reply of the Ministry had not been received (December 2008). 10.9 Cenvat credit availed but prescribed amount not paid on exempted final product Rule 6 of the Cenvat Credit Rules, 2004, stipulates that where a manufacturer avails of cenvat credit in respect of input goods or input services and manufactures such final products which are chargeable to duty as well as exempted goods, then the manufacturer shall maintain separate accounts for receipt, consumption and inventory of input goods and input services used in the manufacture of dutiable and exempted goods. If the exempted goods are other than those specified in sub-rule 3(a) of rule 6 and the manufacturer opts not to maintain separate accounts, then the manufacturer shall pay an amount equal to ten per cent of the sale price of the final goods. M/s. Bayer Crop Science Ltd., in Thane-I Commissionerate, engag....
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....specified in clause (105) of section 65 is provided by a person who has business or establishment or place of residence, in a country other than India, and received by a person who has business or establishment, or place of residence in India and such service shall, for the purpose of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India. Again, Rule 3(1) (ix) of the Cenvat Credit Rules, 2004, provides that a manufacturer or producer of final products shall be allowed to take credit of the service tax leviable under section 66 of the Finance Act. It, therefore, follows from the above that cenvat credit of service tax paid under section 66 A is not admissible to any manufacturer of final products. M/s. Vesuvious India Ltd., and M/s. Areva T and D India Ltd., in Kolkata-VI Commissionerate, engaged in the manufacture of excisable products received taxable services provided by foreign consultants/companies. The records disclosed that both the assessees had paid service tax under section 66A on the services provided from outside India and received in India and took credit of the tax thus paid an....
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....ts are primarily intended for carrying on business or commerce. M/s. Larsen & Toubro Ltd., in Hyderabad-II commissionerate, entered into a contract with M/s. Reliance Industries Ltd., during 2006 for construction of a gas extraction and purification plant in Krishna Godavari Basin near Kakinada in Andhra Pradesh. The terms of agreement inter alia, envisage construction of onshore terminal and infrastructure work consisting of pig receivers, slag catchers, inlet separators, gas dehydration system, laying of under water pipe lines for gas extraction etc., besides civil works such as office buildings, warehouses, approach roads, access and fly over bridges and road widening. During the period from September 2006 to October 2007, the assessee received a total consideration of Rs. 136.75 crore for the above work but applicable service tax of Rs. 16.74 crore was not paid. On this being pointed out (November 2007), the department stated (April 2008) that the issue was in the knowledge of the department and that the Directorate General of Central Excise Intelligence, Chennai Zonal unit had sent a communication on 28 February 2008 stating that the investigation into the case was in ad....
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....anufacturing units and test the quality of raw material and other products used by them. During the financial year 2005-06, the assessee received Rs. 10.95 crore from these units but the applicable service tax of Rs. 1.12 crore was not paid which was recoverable with interest and penalty. On this being pointed out (March 2007), the department stated (September 2007) that a show cause notice demanding service tax of Rs. 3.79 crore for the period from 2004-05 to 2006 was under issue. Reply of the Ministry had not been received (December 2008). 11.1.3 Software and related services 11.1.3.1 Maintenance or repair service was subjected to service tax with effect from 1 July 2003. Maintenance of computer software was exempted from levy of service tax vide notification dated 21 August 2003. The department clarified on 17 December 2003 that computer software was not liable to service tax as the same was not goods. However, the Supreme Court in its judgement in the case of M/s. Tata Consultancy Services [2004 (178) E.L.T. 22] = [2008 -TMI - 4143 - Supreme Court] held that software falls within the definition of goods. The Board vide circular dated 7 October 2005 and 7 March 20....
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....4. Audit observed that the assessee had neither registered itself under service tax nor did it pay the applicable service tax of Rs. 88.67 lakh. Penalty and interest were also leviable. On this being pointed out (December 2006), the Ministry admitted the audit observation and stated (June 2008) that the demand for Rs. 88.67 lakh raised against the assessee had been confirmed (March 2007) alongwith interest and penalty but CESTAT has stayed recovery. 11.1.4 Drilling, boring and core extraction services Services relating to site formation and clearance, excavation and earthmoving have been brought under service tax net with effect from 16 June 2005. As per section 65 (97a) of the Finance Act, 1994, the said services inter alia, cover drilling, boring and core extraction services for construction or similar purposes, soil stabilisation, contaminated top soil stripping work etc. M/s. Essar Constructions (India) Ltd., in Visakhapatnam-I commissionerate, engaged in construction services, entered into two separate agreements during 2006-07 with M/s. National Mineral Development Corporation Ltd., (NMDCL) and M/s. Essar Steels Ltd., for execution of certain earth work. The work ....
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....). 11.1.5.2 By a Notification No. 32/2004-ST., dated 3 December 2004, 75 per cent value of the taxable service provided by GTA to a customer is exempt from levy of service tax subject to the conditions that credit of duty paid on inputs or capital goods used for providing such taxable service is not taken and benefit of Notification No. 12/2003-ST., dated 20 June 2003 is not availed by GTA. The Board clarified on 27 July 2005 that the abatement is permissible only if the goods transport agency declared on consignment note issued, to the effect that neither credit on inputs or capital goods used for provision of service has been taken nor benefit of Notification No. 12/2003-ST. has been taken. M/s. Meena Roadways and M/s. Ashapura Transport, in Rajkot commissionerate, raised debit notes on M/s. Meena Agency Pvt. Ltd., in Rajkot for freight charges amounting to Rs. 3.87 crore during November 2006 to March 2007. The assessee was not eligible for 75 per cent abatement since no declaration on consignment note was available as required for availing of abatement. This resulted in non-payment of service tax of Rs. 47.38 lakh which was recoverable with interest and penalty. This wa....
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....vation and reported (September 2008) recovery of service tax of Rs. 48.10 lakh and interest of Rs. 12.71 lakh. 11.1.7.2 M/s. Marmagoa Steel Ltd., in Goa commissionerate, availed of the services of man power recruitment agencies. Service charges were paid to ten service providers. However, the service providers neither collected applicable service tax from the recipient of services nor they paid the service tax to the Government. Service tax not paid during the period from June 2005 to March 2007 amounted to Rs. 46.84 lakh which was recoverable with interest of Rs. 10.66 lakh and penalty of Rs. 19.67 lakh. On this being pointed out (April 2007), the Ministry admitted the audit observation and intimated (July 2008) that show cause notice for Rs. 66.26 lakh had been issued and an amount of Rs. 42.74 lakh had since been recovered. 11.1.8 Club or association services Section 65(25a) of the Finance Act, 1994, stipulates that any person or body of persons providing services, facilities or advantage for a subscription or any other amount to its members are covered under the service of 'club or association services' but does not include (i) any body established or constituted by....
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....8; its reply had not been received (December 2008). 11.2 Services received from foreign service providers Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, stipulates that in respect of taxable service provided by a person, who is a non-resident or is from outside India and does not have an office in India, the person receiving the taxable service in India is liable to pay service tax. 11.2.1 Intellectual property right service Section 65(55b) of the Finance Act, 1994, defines 'intellectual property service' to mean transferring temporarily or permitting the use of any intellectual property right. It also means any right to intangible property viz. trade marks, designs, patents or any other similar intangible property. The gross amount received by the holder of the intellectual property right in relation to this service is taxable with effect from 10 September 2004. 11.2.1.1 M/s. Star India Pvt. Ltd., (assessee) in Mumbai commissionerate of service tax, entered into an agreement with M/s. Satellite Television Asian Region Ltd. (StarL) for grant of rights by StarL to Star India Pvt. Ltd., to distribute and market the channels Star Plus and Star Utsav. Clause 1.1 of the....
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....partment intimated (February 2008) that a show cause notice was under issue. Reply of the Ministry had not been received (December 2008). 11.2.2.3 M/s. BHEL-GE Gas Turbine Services Pvt. Ltd., in Hyderabad-II commissionerate, engaged in providing of consulting engineers services, maintenance and repair services etc., received input services such as consulting engineers services, scientific and technical consultancy services, online information and database access or retrieval services, commercial training and coaching services, repair and maintenance services from several foreign agencies during the period from August 2002 to March 2006 and paid Rs. 6.99 crore in foreign currency towards the cost of services. The assessee, however, did not pay the applicable service tax of Rs. 65.36 lakh. On this being pointed out (January 2008), the Ministry admitted the audit observation and intimated (September 2008) that a show cause notice demanding Rs. 84.13 lakh with interest and penalty had been issued. 11.2.2.4 M/s. TFL Quinn India Pvt. Ltd., in Hyderabad IV commissionerate, engaged in the manufacture of leather tanning and leather finishing chemicals and-other miscellaneous che....
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....e, engaged in the manufacture of bulk drugs and formulations, obtained several services from different foreign companies which, inter-alia included manpower recruitment, scientific and technical consultancy, technical testing and analysis, business auxiliary services and intellectual property right services. The assessee made payments aggregating to Rs. 28.72 crore during the period 2002-03 to 2004-05 towards the cost of such services but did not pay service tax of Rs. 2.79 crore due thereon. On this being pointed out (July 2007), the Ministry admitted the audit observation and stated (July 2008) that a show cause notice for Rs. 2.79 crore had been issued. 11.2.4 Business process outsourcing services M/s. Proctor and Gamble Home Products Ltd, Mandideep, in Bhopal commissionerate, engaged in the manufacture of detergent powder availed 'business process outsourcing' and 'professional consultancy' services from foreign service providers and paid service charges of Rs. 19.68 crore. Neither did the assessee pay the service tax nor was it demanded by the department. This resulted in non-payment of service tax of Rs. 1.61 crore during the period from 16 August 2002 to 31 December....
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....ng revenue implication of Rs. 19.89 crore noticed during test check are mentioned in the follow paragraphs. These observations were communicated to the Ministry through 19 draft audit paragraphs. The Ministry/department had accepted (till December 2008) the audit observations in 14 draft audit paragraphs with money value of Rs. 17.19 crore of which Rs. 13.41 crore had been recovered. 12.1 Interest on delayed payment of tax Section 75 of the Finance Act, 1994, provides that where a person, liable to pay service tax under section 68 or the Rules made thereunder, fails to pay the tax or any part thereof within the prescribed time, he shall pay interest at the rate of 13 per cent per annum for the period of default. Further, penalty for failure to pay tax is also leviable, in addition to tax and interest, under section 76 of the said Act. 12.1.1 M/s. British Airways, Gurgaon, in Delhi-III commissionerate, provided services as transporter of passengers embarking in India for international journey by air. The assessee charged fare (including service tax) from customers during May 2006 to October 2007 and paid service tax of Rs. 94.94 crore in November and December 2007. The asse....
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....s that where cenvat credit on any input services has been taken or utilised wrongly by a service provider, the same alongwith interest shall be recovered from such provider of output service and the provisions of sections 73 and 75 of Finance Act, 1994, shall apply mutatis mutandis for effecting such recoveries. M/s. Satyam Computers Services Ltd., in Hyderabad-II commissionerate, engaged in rendering of consulting engineers services, manpower recruitment agency services etc., took credit of Rs. 4.15 crore during the period between February 2006 and July 2007, of the service tax paid on health insurance services obtained from insurance companies for the welfare of their employees. The internal audit wing of the department objected to these wrong credits in August/October 2007 and in pursuance of these objections, the assessee reversed the entire credit on 31 August 2007. However, the interest payable on these incorrect credits from the date of taking credit to the date of reversal, amounting to Rs. 46.37 lakh, was neither paid by the assessee nor was it demanded by the department. On this being pointed out (December 2007), the department stated (May 2008) that since the asses....
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....wly established SEZ of M/s. Reliance Petroleum Ltd., at Jamnagar. The records disclosed that these services were rendered outside the SEZ as per SEBI & NSE regulations in connection with issue of shares to public on behalf of their clients. The services could not be considered as having been consumed within the SEZ as the finances mobilised out of these share offerings were wholly monitored/managed and appropriated by their corporate office located in Mumbai. Therefore, the exemption of Rs. 1.52 crore availed by the assessee was incorrect. On this being pointed out (November 2007), the department stated (May 2008) that the Ministry's clarification was applicable to port services, cargo handling services etc., which were physically performed outside SEZ whereas the service in instant case was meant for financing SEZ and was eligible for exemption. It further stated that going by the nature of the services, their physical performance outside SEZ was immaterial as the ultimate consumption had taken place within SEZ and that their registered office which monitored the finances etc., generated out of public issue was located within SEZ. Reply of the department was not acceptable a....
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.... filing of returns and payment of service tax that tax deducted at source (TDS) is to be included in the gross amount charged and service tax is to be paid on the gross amount including TDS. M/s. Bharat Heavy Electricals Ltd., (HPBP unit), in Trichy commissionerate, engaged in manufacture of boiler components, paid service tax on consulting engineer services received from a foreign service provider. The assessee paid service charges of Rs. 64.56 crore in four installments during the year 2006-07. In respect of first three installments, valued at Rs. 51.89 crore, the assessee did not include the income tax deducted at source of Rs. 5.77 crore in the value of taxable service for the purpose of payment of service tax remitted between August 2006 and December 2006. This resulted in short payment of tax of Rs. 70.53 lakh. On the fourth installment of Rs. 12.67 crore, service tax was, however, paid including the value of TDS. Similarly, the assessee paid (March 2006) lump sum of Rs. 5.65 crore to the foreign service provider M/s. ALSTOM, France, for the service rendered towards consulting engineer service and paid service tax on the value of service excluding the amount of TDS of R....