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Comptroller and Auditor General of India's Report on Indirect Taxes - Service Tax Compliance Audit for 2007-08 (Extracts) Year

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....s 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 200 63,503 0.48 1,946.28 196 76,620 0.42 4,092.80 Appellate Commissioners 13 1,011 0.58 172.46 53 1,937 1.59 301.40 Board 0 11 0.00 098 0 6 0.00 0.04 Government 0 3 0.00 1.60 0 1 0.00 0.71 Tribun....

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....ars 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 No. Amount No. Amount No. Amount 2003-04 20 17.56 19 17.25 Nil Nil 19 17.25 2 0.33 5 0.41 7 0.74 2004-05 48 86.57 42 35.59 Nil Nil 42 35.59 8 5.41 14 3.00 22 8.41 2005-06 83 266.47 38 28.40 -- -- 38 28.40 20 7.38 5 1.06 25 8.44 2006-07 125 79.02 117 65.49 1 1.74 118 67.23 60 18.19 30 4.92 90 23.11 2007-08 158 276.72 112 47.43 -- -- 112 47.43 57 23.22 -- -- 57 23.22 Grand Total 434 726.34 328 194.16 1 1.74 329 195.90 147 54.53 54 9.39 201 63.92 9.6.2 Amendment to Act/Rules The Governmen....

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....edit 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 cenvat credit in respect of any inputs or input services and provides such output services which are chargeable to tax or are exempt and does not maintain separate accounts in respect of both category of services, then the provider of output service shall utilise credit only to the extent of an amount not exceeding twenty per cent (35 per cent prior to 10 September 2004) of the amount of service tax payable on taxable output service. 10.1.1 M/s. Vodafone Essar Digilink Ltd., and M/s. Bharti Hexacom Ltd., in Jaipur I commissionerate, engaged in the activity of providing both taxable and exempted cellular phone services, availed cenvat credit on inputs, input services and capital goods. The assessees had not maintained separate account for inputs and input services used in the exempted and taxable services. The assessees p....

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.... 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 in short payment of Rs. 1.13 crore as tax, in cash. Similarly, out of the service tax of Rs. 44.38 crore payable for the subsequent period from June 2005 to March 2007, the tax paid in cash was Rs. 21.50 crore as against Rs. 35.50 crore resulting in short payment of service tax in cash, by Rs. 14 crore. Thus, the total excess utilisation of cenvat credit amounted to Rs. 15.13 crore for the period from September 2004 to March 2007 which was required to be paid in cash. Interest under section 75 of the Finance Act, 1994, was also recoverable. On this being pointed out (December 2007 and February 2008), the department stated (March 2008) that the word 'credit' appearing in rule 6(3)(c) referred to credit of inputs and input services only and the restriction of 20 per cent utilisation was not applicable to the credit of capital goods ....

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....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 excess utilisation of cenvat credit of Rs. 12.05 crore during the period from April 2006 to March 2007, which was required to be paid in cash. The assessee was also liable to pay interest under rule 14 of the said Rules. On this being pointed out (March 2008), the department stated (May 2008) that show cause notice was under issue. Reply of the Ministry had not been received (December 2008). 10.1.6 M/s. Bharat Sanchar Nigam Ltd., Ernakulam, in Cochin commissionerate, availed of cenvat credit of service tax paid on input services and excise duty paid on capital goods. The assessee did not maintain separate accounts and hence was entitled to utilise cenvat credit only to the extent of twenty per cent of the tax liability. However, the assessee, utilised cenvat credit in excess of 20 per cent between July 2006 and August 2006. The credit utilised in exc....

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....ds 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, engaged in providing cellular phone services availed of cenvat credit on several inputs, input services and capital goods which were used by them for rendering both taxable and exempted output services. The assessee had not maintained separate accounts for input goods/input services used in exempted services and yet did not restrict the cenvat credit utilisation to the extent of 20 per cent (35 per cent prior to 10 September 2004) as required under the Rules. Non-observance of the above ceiling limits led to excess utilisation of credit of Rs. 1.02 crore between September and December 2004 which needs to be recovered along with interest and penalty. On this being pointed out (December 2007), the department stated (July 2008) that the ceiling limits prescribed in the rules do not apply to capital goods credit and hence capital goods credit in it's entirety was available....

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....g 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 in five cases had been confirmed and show cause notices for Rs. 1.82 crore to five assessees had been issued. In one case relating to Salem comniissionerate, the Ministry while reporting confirmation of demand stated that the matter was already in its knowledge. The reply with respect to Salem commissionerate is not acceptable as the objection was discussed with the department in August 2007 and show cause notice was issued thereafter in September 2007. Reply in the remaining cases had not been received (December 2008). 10.3 Cenvat credit on input services used in non-taxable output services Rule 3 of the Cenvat Credit Rules, 2004 allows credit of duty on input services used by a service provider for rendering of any taxable output service. The rules also allow credit on common input services used by a service provider for providing taxable services/export services and also exempted....

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....g 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 Finance Act. The term 'exempted services' as defined in rule 2(e) of the said rules covered only taxable services which were covered by section 65 of the Finance Act but were not chargeable with service tax because of exemption. The interpretation given by department for the definition of exempted services was not correct as the word 'includes' appearing in rule 2(e) should not be read in isolation but should be read in conjunction with the word 'taxable services'. The provisions of the Finance Act, 1994 or the Cenvat Credit Rules could not have application to a service which was outside the scope of the Finance Act and hence the credit availed on corresponding input services used in software development services needs recovery along with interest. Reply of the Ministry had not been received (December 2008). Audit recommends that Government should amend the Finance Act to include 'IT services' in t....

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....y 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 services were intangible in nature or because such services were already consumed in the taxable services rendered. Since output goods and output services stand on same footing under Cenvat Credit Rules, cenvat benefits could not be extended to a service on which service tax was not realisable/paid. Reply of the Ministry had not been received (December 2008). 10.4.2 M/s. BPL Mobile Communications Ltd., and M/s. Vodafone India Ltd., in Mumbai commissionerate of service tax, engaged in rendering cellular phone services had shown an amount of Rs. 142.97 crore as dues pertaining to post paid cellular services billed against customers but not realised for the period 2004-05 to 2006-07. Further, the assessees had fully written off such dues The corresponding credit attributable to input services against the above write off was Rs. 1.84 crore which was required to be recovered with interest. On this being pointed out (May 2008....

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....f 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 the basis of invoices issued by the service provider. Reply of the department was not acceptable as debit notes were produced to audit in support of claim of cenvat credit. Further, invoices and debit notes were two independent instruments for calling/getting payment from their customers, clients etc., which could not be raised simultaneously for a single transaction. On being pointed out by audit, the word "debit note". was replaced by 'invoice' on these debit notes and deemed converted into invoices which did not bear the serial number as per instructions contained in paragraph 3.2 of the Board's central excise manual. Reply of the Ministry had not been received (December 2008). 10.6 Cenvat credit on ineligible services Rule 3 of the Cenvat Credit Rules, 2004, provides that a manufacturer of final products may take credit of service tax paid on any input service received if such service is used in the manufacture of final products. As per....

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....nd 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 3(4)(e) of the Cenvat Credit Rules, 2004, allows the Cenvat credit of service tax paid on input services for utilisation against service tax payable on output services. Ten assessees one each in Ahmedabad, Chennai and Mumbai commissionerates of service tax, one each in Chennai-III, Delhi-III, Jalandhar, Panchkula and three in Delhi-IV comnuissionerates of central excise, engaged in the manufacture of various excisable goods, availed of Cenvat credit of duty paid on input goods/capital goods and also service tax paid on various input services. The assessee utilised the Cenvat credit for payment of service tax liability towards the goods transport agencies services availed for inward transport of input goods/capital goods. This was not in order as the assessees were not output service provider. The assessee ought to have paid the service tax relating to the said services by cash. Cenvat credit of Rs. 1.11 crore, incorrectly utilized for payment of service tax on the s....

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....t 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, engaged in the manufacture of both dutiable and exempted goods under chapters 30 and 38, cleared resochin under tariff sub-heading 30049056 valued at Rs. 8.07 crore during financial years 2005-06 and 2006-07 without payment of duty. The assessee had availed cenvat credit on common input services such as telephone and pager services, courier services, inward freight etc., and utilised the credit towards payment of duty on the dutiable goods. Since the assessee had not maintained separate account for common input services, the assessee was liable to pay an amount equal to ten per cent of the value of such exempted clearances. This resulted in non-payment of duty of Rs. 92.44 lakh including interest upto December 2007. On this being pointed out (June 2007), the Ministry admitted the audit observation (July 2008) and intimated that show cause notice was under issue. 10.10 Cenvat credit on service tax received prior to 10 September 2004 Rule 3(1) of the Cenvat Credit Rules, 2004, provides that....

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.... 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 and utilised the credit against duty payable on final goods. Since provisions of the Act and Rules above did not allow such credit of service tax levied under section 66A of the Act, the availing of cenvat credit of Rs. 71.95 lakh during the period between July 2006 and October 2007 was not correct. On this being pointed out (January 2008), the department admitted the audit observation in one case and stated (April 2008) that a show cause notice was under issue. Reply to the other case had not been received (December 2008). Reply of the Ministry had not been received (December 2008). 10.12 Other cases In 19 other cases of grant of Cenvat credit involving tax of Rs. 2.94 crore, the Ministry/department had accepted all audit observations and had reported recovery of Rs. 2.02 crore in 18 cases till December 2008. Chapter XI Non-Levy/Non-Payment of Service Tax Service tax is levied on specified services. The rate of tax has been fixed at 5 per cent upto 13 May 2003, 8 per cent from 14 May 2003, 10 per cen....

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....al of Central Excise Intelligence, Chennai Zonal unit had sent a communication on 28 February 2008 stating that the investigation into the case was in advanced stage after which a demand notice would be issued to the assessee. The reply of the department is not acceptable as at the time when audit had raised the issue in November 2007, the department could not produce any proof that the matter was under investigation and also no demand notice was issued to the assessee. Further more, as per the letter received from Directorate General of Central Excise Intelligence (February 2008), the preliminary report itself was communicated to the commissionerate in January 2008 and the matter was reported to be still under investigation. Further developments in the case had not been received (April 2008). Reply of the Ministry had not been received (December 2008). 11.1.2 Intellectual property 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 prope....

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....preme Court] held that software falls within the definition of goods. The Board vide circular dated 7 October 2005 and 7 March 2006 clarified that maintenance or repair or servicing of software was leviable to service tax with effect from 9 July 2004 i.e. the day exemption notification dated 21 August 2003 was rescinded. M/s. IBM India Pvt. Ltd., Bangalore, in Bangalore commissionerate of service tax, providing software maintenance services, collected service charges of Rs. 33.49 crore from its clients during the period from 9 July 2004 to 7 October 2005. However, service tax of Rs. 3.41 crore leviable thereon was not paid. The department also did not take any action to recover the tax. On this being pointed out (March 2008), the department stated (May 2008) that tax was not recoverable as the action to recover the revenue for the past period was not possible as intent to evade duty on the part of the assessee could not be alleged. The fact remains that failure to take timely action resulted in loss of revenue. The notification dated 21 August 2003 was withdrawn on 9 July 2004 and the Board had clarified on 7 October 2005 and again on 7 March 2006 that tax was leviable from 9 Ju....

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....elopment Corporation Ltd., (NMDCL) and M/s. Essar Steels Ltd., for execution of certain earth work. The work order placed on M/s. NMDCL envisaged excavation and removal of deposited slime in dry or wet condition from the Kadampal tailing dam including all lifts by mechanical means and transporting it upto a lead of 6 kilometres besides loading, unloading, leveling of soils etc. The scope of the other work order with M/s. Essar Steels Ltd., included clearing of jungle, trees, excavation of soft/hard rock, excavation in borrow soils, providing and laying of stone pitching, providing graded crushed rock filter/sand filter etc., for tailing dam II at Padapur. During the period from January to April 2007, the assessee received a total consideration of Rs. 6.33 crore for the works executed but did not pay the applicable service tax of Rs. 78.21 lakh due thereon. On this being pointed out (November 2007), the department stated (April 2008) that a show cause notice demanding service tax of Rs. 78.21 lakh besides interest and penalty had been issued in March 2008. Reply of the Ministry had not been received (December 2008). 11.1.5 Goods transport agency services 11.1.5.1 Rule 2(l)(d)(v)....

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....f service tax of Rs. 47.38 lakh which was recoverable with interest and penalty. This was pointed out to the Ministry/department in May 2008; its reply had not been received (December 2008). 11.1.6 Management consultancy services Service tax on management consultancy service has been levied with effect from 16 October 1998. Section 69 of the Finance Act, 1994, makes a service provider of taxable service liable to get itself registered within 30 days from the date of commencing business of taxable service and where the assessee was already providing service, the date when the service is made taxable under the Act. M/s. SWS India Management Support Service Pvt. Ltd., in Delhi commissionerate of service tax, provided management consultancy services to their clients and recovered Rs. 5.73 crore as consultancy fee between 12 July 2003 and 31 March 2006 as disclosed in the income tax returns and financial records. However, neither did the assessee register itself with the department nor did it pay the applicable service tax of Rs. 53 lakh. Interest and penalty as prescribed under the Act were also leviable. On this being pointed out (January and February 2008), the department state....

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....t does not include (i) any body established or constituted by or under any law for the time being in force; (ii) any person or body of persons engaged in the activities of trade union or promotion of agriculture, horticulture or animal husbandry; (iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature and (iv) any person or body of persons associated with press or media. The service came into the ambit of service tax with effect from 16 June 2005. M/s. Confederation of Indian Industry, in Delhi-I commissionerate, engaged in providing services for the subscription to its members received subscription of Rs. 1.90 crore and Rs. 2.15 crore during the period 2005-06 and 2006-07, respectively. As the assessee did not fall under any categories excluded in the above definition, it was liable to pay service tax of Rs. 45.61 lakh on the subscription collected from the members. In addition, the assessee was liable to pay interest and penalty. On this being pointed out (December 2007 and May 2008), the Ministry while admitting the audit observation stated (September 2008) th....

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....lus and Star Utsav. Clause 1.1 of the agreement defines StarL marks as 'trade names, trade marks, logos, service marks, copyright and characters' used by StarL and its affiliates and licensors from time to time. Clause 7 provides that the agreement shall continue for a period of 6 years. The assessee used trade marks/trade names and paid an amount of Rs. 114.38 crore during the year 2006-07 in foreign currency. However, service tax of Rs. 14.00 crore leviable thereon was not paid by the assessee (M/s. Star India Pvt. Ltd.). This was pointed out to the Ministry/department in November 2007; its reply had not been received (December 2008). 11.2.1.2 M/s. Areva T&D, Perungudi, Chennai, in Chennai commissionerate of service tax engaged in manufacture of circuit breakers paid Its. 8.73 crore as trade mark fee to their parent company in France for the period from April 2005 to December 2006. However, the assessee (M/s. Areva T&D, Perungudi) did not pay service tax of Rs. 1.04 crore even though trade mark attracted service tax under intellectual property service. This was pointed out to the Ministry/department in December 2007; its reply had not been received (December 2008). 11.2.2 Con....

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....ellaneous chemicals, plastics etc., adopted the technology and technical know how provided by TFL, Germany and their subsidiary companies located in France & Italy. As part of the process of transfer of technology, the assessee was extended training facilities by the said foreign agencies for imparting skills to the staff/ technicians of the assessee. The assessee in turn, utilised these skills/technology in his manufacturing operations. During the period from 2002-03 to 2006-07, the assessee made payments aggregating to Rs. 5.86 crore towards the cost of such services but did not discharge applicable service tax liability of Rs. 50.63 lakh. On this being pointed out (August 2006), the Ministry admitted the audit observation, reported (September 2008) recovery of Rs. 32.44 lakh and issue of show cause notice for the recovery of balance amount of Rs. 18.18 lakh. 11.2.2.5 M/s. Goodyear South Asia Tyres Pvt. Ltd., in Aurangabad commissionerate, received technical information including engineering information and technical know-how, technical assistance from M/s. Goodyear Tyre and Rubber Company, Ohio, USA. The assessee paid Rs. 4.13 crore for these services during 2004-05. However, ....

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....Interest and penalty was leviable in addition to the tax. On this being pointed out (September 2006), the department stated (October 2006) that service tax payable by the person receiving the service in India was notified on 31 December 2004. Thus, service tax was payable by the receiver of any taxable service provided by a person from outside India only with effect from 1 January 2005. The reply of the department is not acceptable because prior to 1 January 2005, the service provided by the foreign agencies fell under the category 'consulting engineers' on which service tax was payable from 16 August 2002 in terms of rule 2(1)(d)(iv). Reply of the Ministry had not been received (December 2008). 11.2.5 Business auxiliary service etc. M/s. Flakt (India) Ltd., Kolkata, in Kolkata-VI commissionerate, engaged in the manufacture of excisable product received services which, inter a included services in the field of international marketing and sales and product support, manufacturing, purchase and administration, taxation and legal matters, treasury and finance management etc., from foreign service providers. The assessee also obtained the right to use the trade mark license of M/s.....

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.... payment of service tax and the department also did not demand the interest due. This resulted in non-recovery of interest of Rs. 9.04 crore, besides penalty On this being pointed out (December 2007), the department intimated (March 2008) that the interest of Rs. 9.04 crore had been recovered between December 2007 and February 2008. Reply of the Ministry had not been received (December 2008). 12.1.2 M/s. Bharat Sanchar Nigam Ltd. (BSNL), Assam Telecom Circle (Cellular Mobile Service), in Shillong commissionerate failed to deposit the service tax in time on various occasions during the period from 2004-05 to 2006-07, for which interest of Rs. 1.33 crore was recoverable. The internal audit party of the department had pointed out non-payment of interest of Rs. 1.90 lakh and non-payment of service tax of Rs. 7.83 crore for the period from May 2006 to March 2007 in July 2007 but the department did not issue any show cause notice to the assessee for realisation of the interest of Rs. 1.33 crore (including Rs. 1.90 lakh pointed out by internal audit) On this being pointed out (January 2008), the Ministry admitted (November 2008) audit observations in principle. 12.1.3 M/s. Prakash Ar....

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....f interest on the credit lying unutilised was not warranted in view of a plethora of judicial decisions of Tribunals/High Courts [(i) 2006 (205) E.L.T. 24, (ii) 2007 (215) E.L.T. 119 & 433 and (iii) 2007 (6) S.T.R. 53) Department also stated that the decision of Punjab & Haryana High Court in this regard [2007 (214) E.L.T. 173] was upheld by the Supreme Court also [2007 (214) E.L.T. - A-50]. The fact, however remains that under rule 14 of the Cenvat Credit Rules, 2004, it was statutorily required that where cenvat credit had been taken or utilised wrongly, the same alongwith interest was recoverable. The anomalous situation that had cropped up due to above judicial pronouncements needs to be remedied by Government by making the relevant provisions more explicit and unambiguous, as otherwise the provisions of the said rule with regard to recovery of interest were not enforceable even though the assessees commit breach of cenvat provisions by taking wrong credits on ineligible services. Audit recommends that Government should amend the Rules, in view of post judicial pronouncements, to bring the provisions of the rules, consistent with these. Reply of the Ministry had not been rec....

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.... which monitored/managed the finances was located at Mumbai. Even the registered office of the company which was carrying on the administration of the SEZ was also located outside the SEZ and therefore the services rendered by the assessee to these clients stand on same footing as that of a port service or cargo handling service or warehousing service rendered outside/ consumed outside the SEZ as clarified by the Ministry. Reply of the Ministry had not been received (December 2008). 12.4 Splitting of value of services into components to avoid tax Section 67(1) of the Finance Act, 1994, stipulates that where provision of service is for a consideration in money, service tax is chargeable on the gross amount charged by the service provider for such service rendered by him. M/s. Narayana Coaching Centre, Nellore, in Guntur commissionerate, engaged in providing coaching services collected Rs. 12.53 crore from students towards the cost of coaching services rendered during the period from 16 June 2005 to 31 March 2007. Though all these charges were collected in relation to coaching services offered to hostellers, the assessee bifurcated these charges into tuition fee, mess charges and....