Inside Eyes: July 2009

Wednesday, July 29, 2009

Income Accrue or Arise in India although earned outside India?

A look at what constitutes as Income on Indian soil and what is not from the perspective of the IT department. The IT department defines certain incomes as Accruing or Arising in India. This is the basis of calculating your income and income tax. Let’s know more. The IT department says that for any company or individual (resident or non-resident) who also has business in geographical locations outside India, only the part of income which can be reasonably attributed to have been earned in operations happening in India will be considered for calculation of Income tax.

RESIDENTIAL MATTERS:
There arises a question of who/what is a Resident of India and who/what is not a resident of India. The IT department has defined these entities. An Individual is defined as a resident in India in the previous year if he/she satisfies one of the following conditions:

1. He/she has spent a total of 182 or more days in India in the assessment year.
2. If he/she has spent a total of 60 days or more in the assessment year and has spent a total of 365 days in the previous four years. For example in case the assessment year is 2008-09, then if you have spent >60 days in India between 1st April 2008 and 31st March 2009 and a total of >365 days during 1st April 2004-31st March 2008.
3. For anyone who is in the merchant navy (but, on an Indian Ship) or has gone out of the country for employment, the above clause will become 182 days in the assessment year and 365 days in preceding four years. The IT department also states very clearly that if a person is deemed resident for one source of income, then, he will be counted as resident for all incomes in that particular year. A person is said to be not ordinarily resident in India if that person satisfies any one of the following criteria:-
a) Has been a non-resident in India in nine out of ten years preceding the year of assessment.
b)Has spent less than 792 days combined during a period of 7 years prior to the assessment year. Now that we have suitably understood who is defined as a Resident Indian for the purposes of Income tax, let’s look at which of their income is deemed Indian. The following are considered to be income accrued in India. Any income which is gained from or through any business connection in India. This could be directly or indirectly. Incomes which are received from a property which is situated inside Indian borders. Through or from any source based in India and from the sale of a capital asset inside India. Thus what the IT department says is that if they can clearly define that the source of the income is in India then the Income too is accrued in India. To put the above discussion into clearer terms:
1). Any salary paid in India is deemed to have accrued in India. Even any charges which are collected as payable for a service rendered in India is regarded as income earned in India.
2). If a government employee or citizen of India is reimbursed by the Government for rendering any service outside India then it is deemed as accrued in India.
3). Any dividend which is paid by an Indian company outside India to a resident as defined earlier will be considered as an income earned in India.
4). Interest payable by the government is considered as accrued in India. This would apply for all kinds of government securities and saving instruments like bonds.
5). Any interest received from a resident except if that person has borrowed money from you to pursue business activities outside India. The logic behind this could be that this would ensure positive cash flow into India.
6). If the interest is paid by a non-resident to you then it will be added to your income except if that person has used the money borrowed from you to use for business activities in India. The logic behind this would be to boost investments in India.
7). The same concepts of point 4, 5 and 6 are applicable for any income generated from Royalties or copyrights.
8). For any income from fees for technical services provided the IT department uses the yardsticks as mentioned in points 4, 5 and 6. Although at a cursory glance some of the ideas discussed above might sound to be the stuff that our Auditor/Financial Planner should be concerned with and not us, it is imperative that we understand the philosophy behind them so that we are more in control of our income tax assessments. With the increasing benefits of technology the tax man is becoming more and more competent in keeping track of your activities vis-à-vis your income tax implications. Thus it is highly advisable that we are very clearly aware of all the rules and regulation and ensure 100% compliance. After all it’s our hard earned money that will work hard for the Indian economy.

Tuesday, July 28, 2009

In an indivisible contract no VAT if Service Tax is paid

In an indivisible contract no VAT if Service Tax is paid :

Court : SC

Brief : : (1) In the matter of interpretation of a taxing statute, as also other statutes where the applicability of Article 246 of the Constitution of India, read with Seventh Schedule thereof is in question, the Court may have to take recourse to various theories including aspect theory. (2) A distinction must be borne in mind between an indivisible contract and a composite contract. If in a contract, an element to provide service is contained, the purport and object for which the Constitution had to be amended and clause 29A had to be inserted in Article 366, must be kept in mind. a legal fiction is created by reason of the said provision. (3) Such a legal fiction, as is well known, should be applied only to the extent for which it was enacted. It, although must be given its full effect but the same would not mean that it should be applied beyond a point which was not contemplated by the legislature or which would lead to an anomaly or absurdity. (4) The Court, while interpreting a statute, must bear in mind that the legislature was supposed to know law and the legislation enacted is a reasonable one. The Court must also bear in mind that where the application of a Parliamentary and a Legislative Act comes up for consideration; endeavours shall be made to see that provisions of both the acts are made applicable. (5) Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. (6) It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided.

Citation : www.taxindiaonline.com

Judgment :

In an indivisible contract no VAT if Service Tax is paid : Supreme Court By TIOL News Service NEW DELHI, JAN 16, 2008 : WHETHER the charges collected towards the services for evolution of prototype conceptual design (i.e. creation of concept), on which service tax had been paid under the Finance Act, 1994 as amended from time to time is liable to tax under the Karnataka Value Added Tax Act, 2003 is the question involved in this appeal before the Supreme Court. Appellant is an advertising agency. It creates original concept and design advertising material for their clients and design brochures, annual reports etc. Further facts are not relevant – let's get straight to what the Supreme Court observed. The fact that the appellant is a service provider is not in dispute. It is also not in dispute that the orders received by it to provide such services is party specific and issue specific; be it for issuance of a brochure or a year book or for any other purpose. Appellant, in their returns, made three categorical divisions in regard to its tax liabilities:- (1) The amount of service tax on the specific design and production; (2) The amount of Kerala Sales Tax on the specified item on the first sale; and (3) when certain items are outsourced, the tax payable on resale of the said goods in terms of Section 6(4) of the Kerala Sales Tax Act. The Tribunal as also the High Court opined that the contract was an indivisible one. The effect of such an indivisible contract, vis -a- vis work contract came up for consideration before the Court in The State of Madras v. Gannon Dunkerley & Co., ( Madras ) Ltd. wherein it was clearly held : To avoid misconception, it must be stated that the above conclusion has reference to works contracts, which are entire and indivisible, as the contracts of the respondents have been held by the learned Judges of the Court below to be. The several forms which such kinds of contracts can assume are set out in Hudson on Building Contracts, at p.165 . It is possible that the parties might enter into distinct and for money consideration and the other for payment of remuneration for services and for work done. The question came for consideration again in Builders Association of India & Ors. v. Union of India & Ors. and M/ s.Gannon Dunkerley & Co. & Ors. v. State of Rajasthan & Ors. It had been laid down that the effect of amendment by introduction of clause 29A in Article 366 is that by legal fiction, certain indivisible contracts are deemed to be divisible into contract of sale of goods and contract of service. In Gannon Dunkerley case, it had been held: Keeping in view the legal fiction introduced by the Forty-sixth Amendment whereby the works contract which was entire and indivisible has been altered into a contract which is divisible into one for sale of goods and other for supply of labour and services, the value of the goods involved in the execution of a works contract on which tax is leviable must exclude the charges which appertain to the contract for supply of labour and services. A Constitution Bench in Tata Consultancy Services opined that having regard to the definition of the term goods contained in clause (12) of Article 366 of the Constitution of India, a software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme, but the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. In regard to the element of intellectual property, it was held that the same having been incorporated on a media, for purposes of transfer, both tangible and intangible property capable of being transmitted, transferred, delivered, stored and possessed etc. would come within the purview thereof. The question yet again came up for consideration before a Three Judge Bench of the Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India wherein it was held; 44. Of all the different kinds of composite transactions the drafters of the Forty-sixth Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in sub-clauses ( b ) and ( f ) of clause (29-A) of Article 366, there is no other service which has been permitted to be so split. For example, the sub-clauses of Article 366(29-A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the Sales Tax Authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking, with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases. 45. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley case 5, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29-A) continues to be: Did the partie s have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test. 50. What are the goods in a sales transaction, therefore, remains primarily a matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject-matter of sale or purchase. The court would have to arrive at the conclusion as to what the parties had intended when they entered into a particular transaction of sale, as being the subject-matter of sale or purchase. In arriving at a conclusion the court would have to approach the matter from the point of view of a reasonable person of average intelligence. 20. We may, at this juncture, also notice the decision of this Court in Associated Cement Company (supra). The question which arose for consideration by the Supreme Court in Associated Cement Company , was as to whether any intellectual property contained in a software would be subject to custom duty within the meaning of Section 2(22) of the Customs Act, defining goods. A three Judge Bench of the Court sought to make a distinction between such a contingency arising under the Customs Act involving a works contract and a contract of sale stating : 32. In the sales tax cases referred to hereinabove no doubt the question which arose was whether in a works contract, where there was a supply of materials and services in an indivisible contract, but there the question had arisen because the States powers prior to the Forty-sixth Amendment to the Constitution, were not entitled to bifurcate or split up the contract for the purpose of levying sales tax on the element of moveable goods involved in the contract. Apart from the decision in Rainbow Colour Lab case, which does not appear to be correct, the other decisions cited related to the pre-Forty-sixth Amendment period. Furthermore, the provisions of the Customs Act and the Tariff Act are clear and unambiguous. Any moveable articles, irrespective of what they may be or may contain, would be goods as defined in Section 2(22) of the Customs Act. Therefore the decision of Associated Cement Company seeks to make a distinction between cases arising out of works contract where sales tax is liable to be paid and the cases under the Customs Act. The Supreme Court observed that in none of the above cases covered the concept of works contract involving both service as also supply of goods constituting a sale. In Tata Consultancy as also in Associated Cement Company , what was in issue was the value of the goods and only for the said purpose, the Court went by the definition thereof both under the Customs Act as also the Sales Tax Act to hold that the same must have the attributes of its utility, capability of being bought and sold and capability of being transmitted, transferred, delivered, stored and possessed. As software was found to be having the said attributes, they were held to be goods. Indivisible contract vs composite contract? In the case at hand, the Supreme Court is faced with a different problem. Appellant admittedly is a service provider. When it provides for service, it is assessable to a tax known as service tax. Such tax is leviable by reason of a Parliamentary statute. The Supreme Court observed, (1) In the matter of interpretation of a taxing statute, as also other statutes where the applicability of Article 246 of the Constitution of India, read with Seventh Schedule thereof is in question, the Court may have to take recourse to various theories including aspect theory. (2) A distinction must be borne in mind between an indivisible contract and a composite contract. If in a contract, an element to provide service is contained, the purport and object for which the Constitution had to be amended and clause 29A had to be inserted in Article 366, must be kept in mind. a legal fiction is created by reason of the said provision. (3) Such a legal fiction, as is well known, should be applied only to the extent for which it was enacted. It, although must be given its full effect but the same would not mean that it should be applied beyond a point which was not contemplated by the legislature or which would lead to an anomaly or absurdity. (4) The Court, while interpreting a statute, must bear in mind that the legislature was supposed to know law and the legislation enacted is a reasonable one. The Court must also bear in mind that where the application of a Parliamentary and a Legislative Act comes up for consideration; endeavours shall be made to see that provisions of both the acts are made applicable. (5) Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. (6) It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided.

In an indivisible contract no VAT if Service Tax is paid :

Service tax on hire purchase, leasing transactions

In a recent decision, the Madras High Court had an occasion to deal with the matters of service taxation of hire purchase and lea-sing transactions of moveable goods and to determine whether such a tax was constitutionally valid. In the case of Madras Hire PurchaseAssociation and Others vs. Union of India and others (2009-TIOL-338-HC-MAD-ST), the issue before the court was whether such transactions involved any element of service, in order for the service tax to apply, especially in the light of the fact that such transactions were expressly made chargeable to VAT, which was a tax in relation to goods.

The petitioners argued that they were non-banking financial companies (NBFCs) and were engaged inter-alia in the business of hire purchase and leasing and that the 46th Amendment to the Constitution of India had inserted Article 366 (29A) in order to deem a set of six transactions enumerated thereunder as constituting a sale of goods and to therefore be chargeable to a sales tax, now VAT. These included the transfer of the right to use of any goods for any purpose as well as hire purchase and leasing transactions. Consequently, the State had imposed a sales tax, now VAT, on the aforesaid transactions and the entire amount paid by the hiree / lessee to the hirer / lessor by way of installments were made chargeable to the VAT. Accordingly, no service element was at all envisaged or involved in these transactions. It was also argued based on the underlying invoices as well as the related documentation that the parties to the contract did not at any time envisage any services to be provided and indeed no charges were collected towards rendition of services. Hence, the extension of the service tax to hire purchase and leasing transactions was violative of various Articles of the Constitution of India.

The appellants relied on several judgements of the Supreme Court including Bharat Sanchar Nigam Limited vs. Union of India(2006-TIOL-15-SC-CT-LB), which had held that a particular transaction could not be charged to both the goods tax and the service tax and the test for deciding whether a transaction fell within the ambit of either tax was to determine its substance i.e. its dominant nature. Reliance was also placed on another decision of the Supreme Court in Imagic Creative Pvt. Ltd. vs. Commissioner of Commercial Tax (2008-TIOL-04-SC-VAT) which had held that service tax and VAT were mutually exclusive and operated in mutual domains.

In addition to the above Supreme Court decisions, reliance was also placed on the recent decision of the Delhi High Court in Home Solution Retail India Ltd vs. Union of India (2009-TIOL-196-HC-DEL-ST), which held that there was no service element in regard to renting of immoveable property and had consequently set aside the charge of service tax on rentals pertaining to letting out of immoveable property on lease.

As opposed to the aforesaid arguments, the state relied on the decisions of the Supreme Court in Tamil Nadu Kalyana Mandapam Association vs. Union of India, (2004-TIOL-36-SC-ST) and in Gujarat Ambuja Cements Ltd. vs Union of India, (2005-TIOL-53-SC-ST) to argue that the levy of service tax on hire purchase / leasing transactions was constitutionally valid and hence the definition of banking and other financial services in service tax law as ‘financial services including equipment leasing and hire purchase’ was entirely proper and legal.

In particular, reliance was placed on the observation of the Supreme Court in the Kalyana Mandapam case (supra) that it was incorrect to argue that the transactions envisaged under Article 366 (29A) could not be charged to a service tax merely on the ground that such transactions were deemed to be sales and charged to the sales tax to the extent that there was a sale of goods, intended or otherwise, in relation to such transactions. Further, the Government had granted a deduction of 90 per cent from the installment amounts and only the balance 10 per cent was charged to the tax.

The Madras High Court took note of these contending arguments and also considered the definition of banking and other financial services as contained in the service tax provisions. It noticed that the appellants had admittedly collected service charge at 1 per cent for preparation of documentation and other incidental activities relating to hire purchase/lease transactions. At the same time, it took note of the argument that the appellants had not charged or recovered any sums towards any service charges as part of the installments for rentals, which was the principal transaction in question.

The High Court thereupon held that the hire purchase and leasing transactions admittedly included the concept of rendering of services. Consequently, the service tax that had been imposed on the transaction in question was constitutionally valid.

The Court appears to have come to this determination perhaps based on the admission of the appellants that they had collected a service charge of 1 per cent with regard to preparation of documents and other incidental activities. This admission was in relation to the aforesaid incidental activities only and was not with regard to the principal activity. Nevertheless, the Court has come to its finding, without a substantive discussion on the point. With regard to the challenge of the appellants that the service tax on hire purchase and leasing transactions was discriminatory in law, the High Court has held that there was no basis for this argument since banking companies, as opposed to the NBFC appellants, were indeed paying service tax on similar transactions of hire purchase and leasing that they were carrying out. Finally, the Court also negated the argument that such a tax restricted the freedom envisaged under Article 19 of the Constitution.

In sum, the High Court has upheld the charge of service tax on hire purchase and leasing transactions, notwithstanding that the same transactions were chargeable to the VAT. This decision in effect upholds the double taxation of the same transaction of hire purchase and leasing to both the service tax as well as the VAT. It remains to be seen whether an appeal would be preferred to the Supreme Court against this decision and what the decision of the Supreme Court would be in regard to such an appeal.

Friday, July 10, 2009

AAR on taxability of a US company for allowing use of its database located abroad to customers in India against subscription fees--Not Chargeable

The subscription fee received by the American company from the licensee (user of database) does not fall within the scope of clause (v) of Explanation (2) to section 9(1) of the Income-tax Act, 1961 and the same is not taxable in India as royalty; it is liable to be taxed only as business income if at all it is found by the Revenue that an agency PE exists of the American Company.

THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI

FactSet Research Systems Inc., In reAAR No. 787 of 2008June 30, 2009RELEVANT EXTRACTS:1.1 The following facts are stated in the application and in the written submissions filed: The applicant maintains a ‘database’ which is located outside India and which contains the financial and economic information including fundamental data of a large number of companies world-wise. The customers of the applicant are mostly financial intermediaries and investment banks which have the need for such data. The databases contain the published information collated, stored and displayed in an organized manner by Fact Set, though the information contained in the database is available in public domain. The applicant, however, through its database enables the customer to retrieve this publicly available information within a shorter span of time and in a focused manner. The database maintains historical information and all the databases of FactSet are maintained at its datacenters in USA. For a customer to access and view FactSet data, the customer need to down-load client interface software (similar to internet browser). The customer can subscribe to specific database as per its requirement. The ‘lion-share’ database provides information on the shareholding by global holders of global equities. The ‘Shark repellent’ database provides information on takeover defence strategies adopted by various U.S. Public companies over a period of time. The Mergerstat database tracks formal transfers of ownership. A Call street database includes transcripts of quarterly conference calls (e.g. analysts’s queries) held by public companies. There are some more databases also. A customer can view the data on their computer screens. The software, tools database and other related documentation are hosted on the FactSet’s main frames and data libraries. Through the tools, any commercial data on FactSet’s database can be easily woven into charts, graphs and spread-sheets. FactSet allows the data to be viewed and used only in the internal documents of its customers. The applicant seeks advance ruling on the following questions formulated by it:1. Whether, on the facts and circumstances of the case, FactSet Research Systems Inc. (‘FactSet’ or ‘the applicant’) will not be taxable in India under the Income-tax Act, 1961, with respect to the subscription fees?2. Whether, on the facts and circumstances of the case, the applicant will not be taxable under the Double Taxation Avoidance Agreement entered into between the Government of India and the Government of United States of America with respect to the subscription fees?3. Whether, on the facts and circumstances of the case, if the applicant is not taxable in India for the subscription fees, its customers in India will be required to withhold taxes under section 195 of the Act on subscription fees paid to the applicant?4. Assuming that the applicant has no other taxable income in India, whether, on the facts and circumstances of the case, the applicant will be absolved from filing a tax return in India, under the provisions of Section 139 of the Act with respect to the subscription fees?5. Broadly, the contention of the applicant is that no tax liable to be paid on the subscription fees received from the customers in India as it does not constitute ‘royalty’ or ‘fees for technical services’ either under the provisions of the Income-tax Act, 1961 or the DTAA (Treaty) between India and USA. Moreover, as the applicant does not have permanent establishment (PE) in India, the subscription fees cannot be taxed as business income in view of Article 7 of India-USA Treaty.6. Let us now notice the material terms of MCL Agreement. The applicant is the Licensor and the Licensee is the subscriber/customer. Clause 1.a declares that the licensor grants to the licensee “limited, non-exclusive, non-transferable rights to use the software, hardware, consulting services and databases”. As regards the consulting service, it is stated that FactSet provides certain consultants who are able to demonstrate the FactSet’s products and its uses to the customers. It is clarified in the rejoinder that consulting services are not really required as FactSet provides helpdesk facilitation free of cost, though at present, there is no such facilitation Centre in India. As regards hardware, it is clarified in the rejoinder that at present no hardware is being provided to the customers in India.4.1 According to cl. 2.a the licensor provides the services solely and exclusively for licensee’s own internal use and business purposes only in the licensee’s business premises. The licensee’s employees having a password or user ID can access the service. Further, the licensee cannot use or permit any individual or entity under its control to use the services and the licensed material for any unauthorized use or purpose. Clause 1.b makes it clear that all proprietary rights including intellectual property rights in the software, databases and all related documentation (“licensed material”) will remain the property of licensor or its third party data/software suppliers. The licensee is permitted to use licensor’s name for the limited purpose of source attribution of data got from the database in the internal business reports and the like. Licensee is solely responsible for obtaining required authorization from the suppliers for products received through them and in the absence of such authorization the licensor has the right to terminate the licensee’s access to any supplier product.4.2 Clause 2.c reads as follows:Clause 2.c. Except as permitted under this Agreement or under a written agreement with a Supplier, Licensee agrees that it will not copy, transfer, distribute, reproduce, reverse engineer, decrypt, decompile, disassemble, create derivative works from or make any part of the Service, including the data received from the Service available to others. Licensee may use Insubstantial amounts of the Licensed Materials in the normal conduct of its business for use in reports, memoranda and presentations to Licensee’s employees, customers, agents and consultants, but Licensor, its Suppliers and their respective affiliates reserve all ownership rights and rights to redistribute the data and databases.”4.3 Clause 2.d on which the Revenue placed reliance may also be noticed.Clause 2.d: Licensor represents and Licensee acknowledges that the Service and its component parts were developed, compiled, prepared, revised, selected and arranged by Licensor, its Suppliers or their respective affiliates through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, money and originality and that they constitute valuable intellectual property and trade secrets of Licensor and its Suppliers. At Licensor’s expense and reasonable request, Licensee agrees to cooperate with Licensor and its Suppliers to protect the proprietary rights in the software and databases during the terms of this Agreement.”4.4 Coming to the other clauses, the fees is payable within 30 days of receiving the invoice failing which the Licensor may suspend the licensee’s access (vide clause 4). The initial term of the agreement is as set forth in Schedule (A) and thereafter the agreement can be renewed for successive one year periods (vide cl. 5). Clause 5.c stipulates that upon termination of the agreement, licensee will cease using all the licensed material, return any licensor hardware upon request and expunge all data and software from its storage facility and destroy all documentation except such copies of data to the extent required by law. Another restriction placed by cl. 5.d is that the Licensee may not use any part of the services (for eg., Index value) to create a proprietary financial instrument or to list on its exchange facilities. In various schedules relating to different databases, the rates of ‘fixed price service’ and ‘Pay-As-you-Go Service’ are set out.7. Most of the focus was on ‘royalty’ provision contained in the Act and in the DTAA and the main and substantial question argued was whether the fee received by the applicant could be brought within any of the limbs of ‘royalty’ definition. Section 9(1)(vi) of the Act brings the income by way of royalty within the ambit of deemed income. Explanation 2 to clause (vi) of Section 9(1) defines ‘royalty’ as follows:Explanation 2 – For the purposes of this clause “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for –(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;[(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB;](v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v).7.1 Article 12 of the DTAA between India and USA deals with ‘royalty’ and ‘fee for included services’. Such incomes can be taxed in the Contracting State in which they arise and according to the laws of that State (vide Art. 12.2). The term ‘royalty’ is defined in Art. 12.3 as follows:Article 12.3 3. The term “royalties” as used in this Article means:(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films, or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and(b) payments of any kind as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) of Article 8.8. The first question is whether the amounts received by the applicant constitute consideration for the transfer of any rights in respect of the copyright or for the use or right to use any copyright of a literary/scientific work.8.1 The expression ‘copyright’ is not defined in the Income tax Act. It must be understood in accordance with the law governing copyright in India viz. Copyright Act, 1957. In State of Madras vs. Ganon Dunkrley & Co.*, the Supreme Court held that the expression ‘sale of goods’ in Entry 48 of List II (VII Schedule) of the Govt. of India Act is a nomen juris and shall be construed in its legal sense. The legal sense can only be what it has in the law relating to sale of goods and therefore the said expression shall bear the same meaning as it has in Indian Sale of Goods Act. Looking at the Treaty, we have Art.2.2 which clarifies how the undefined terms shall be understood. In substance, it says that an undefined term shall have the meaning which it has under the taxation law of the State concerned. When the term is not defined in the taxation law (I.T.Act), the definition in the law governing the subject-matter ought to be adopted, more so when there is no basic difference between the statutory definition and the ordinary legal concept. Section 16 of Copyright Act lays down that no person shall be entitled to copyright or any similar right in any work otherwise than under and in accordance with the provisions of this Act or any other law in force.8.2. Section 14 gives the meaning of copyright. This Section was substituted for the previous one by the Copyright (Amendment) Act of 1994. Section 14 in so far as it is relevant is extracted hereunder:14. For the purposes of this Act, “Copyright” means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely:(a) in the case of a literary, dramatic or musical work, not being a computer programme –(i) to reproduce the work in any material form including the storing of it in any medium by electronics means;(ii) to issue copies of the work to the public not being copies already in circulation;(iii) to perform the work in public, or communicate it to the public:(iv) to make any cinematograph film or sound recording in respect of work;(v) to make any translation of the work;(vi) to make any adaptation of the work;(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clause (i) to (vi)9.3 We are, therefore, of the view that the subscription fee received by the applicant from the licensee (user of data base) does not fall within the scope of clause (v) of Explanation (2) to Section 9(1) of the Act.10. Even examining from the standpoint of Treaty, we do not think that “the use of or right to use any copyright of a literary or scientific work” is involved in the subscriber getting access to the database for his own internal purpose. It is like offering a facility of viewing and taking copies for its own use without conferring any other rights available to a copyright holder. The expression ‘use’ (of copyright) is not used in a generic and general sense of having access to a copyrighted work. The emphasis is on the “use of copyright or the right to use it”. In other words, if any of the exclusive rights which the owner of copyright (the applicant) has in the database are made over to the customer/subscriber so that he could enjoy such rights either permanently or for a fixed duration of time and make a business out of it, then, it would fall within the ambit of phrase ‘use or right to use the copyright’. What rights of exclusive nature attached to the ownership of copyright have been passed on to the subscriber atleast partially? Is the licensee conferred with the right of reproduction and distribution of the reproduced work to its own clientele? Can it be publicly exhibited or its contents be communicated to the public? Is the applicant given the right to adapt or alter the ‘work’ for the purpose of marketing it? The answer is obviously – no. The underlying copyright behind the data base cannot be said to have been conveyed to the licensee who makes use of the copyrighted product.13. In the result, the questions are answered as follows :Qn.Nos.(1) & (2):The subscription fee is not taxable in India as royalty. It is liable to be taxed only as business income if at all it is found by the Department that an agency PE exists. At present, on the facts stated by the applicant, we must hold that PE is not in existence and therefore the income is not liable to be taxed in India.Qn.No.(3):The customers are not required to withhold the tax, until and unless the Department finds the existence of PE after due enquiry.Qn.No.(4):At present, there is no obligation to file the return in view of our finding that there is no royalty income and on the facts stated by the applicant, there is no PEAccordingly, the ruling is pronounced on this 30th day of June, 2009.

GIFT TAX -AFTER BUDGET 2009

It is widely known that gifts from relatives are tax-exempt. But what is not widely known at all is that gifts received even from non-relatives can also be completely exempt from income tax. Here is the complete run-down from a renowned tax expert. It is very common for people to receive gifts from friends and relatives. In some cases, gifts are also received from NRls. Let us consider the latest provisions of the Income Tax Act, 1961 regarding gifts, and analyse how individuals can achieve complete exemption from income tax in respect of the gifts during the current financial year. (The sections mentioned below refer to the Income Tax Act, 1961.)

Gifts are Taxable Only in the Case of Individuals and HUFs
Under the provisions of Section 56(2)(vi) certain gifts are liable to income tax as "income from other sources". However, this provision is applicable only for individuals and Hindu Undivided Families (HUFs). Thus, if gift is received by any Trust or A.O.P., then it is not liable to income tax as "income from other sources". The provision of taxation of gifts became applicable in respect of gifts received on or after 1.9.2004 and before 1.4.2006 if the gift money exceeded Rs. 25,000. From 1.4.2006, this amount has been increased to Rs. 50,000 so that cash gifts and gifts by cheque or bank draft from non-relatives and from non-exempted categories can be fully exempt from income tax up to Rs. 50,000 in aggregate in one financial year.

Gifts from Relatives are Tax-Exempt
Importantly, the provisions of the aforesaid Section 56(2)(vi) applicable to the taxation of gifts in excess of Rs. 50,000 in a financial year in the aggregate are applicable for gifts received from non-relatives. Thus, any gift from relatives of any amount during the financial year is completely exempt from tax. Therefore, it's crucial to know the meaning of the expression 'relative' for this purpose. The Explanation to Section 56(2)(vi) provides that the expression "relative" means:
Spouse of the individual;
Brother or sister of the individual;
Brother or sister of the spouse of the individual;
Brother or sister of either of the parents of the individual;
Any lineal ascendant or descendant of the individual;
Any lineal ascendant or descendant of the spouse of the individual; and
Spouse of the person referred to in clauses (ii) to (vi).

Gift of more than Rs. 50,000/- can be received frombelow mentioned relatives without any taxes
Notes:
1. Subject to clubbing provisions applicable for Gift received from Spouse and Father-in-Law.
2. The individual can receive gifts without attracting tax also from lineal ascendants and decedents of the individual other than those mentioned in the above chart.
Thus, a gift received by an individual from his spouse, or from his brother or sister, or from the spouse's brother or sister, parents, or from any lineal ascendant or descendant of oneself or one's spouse would normally be fully tax-exempt. Similarly, any gifts of any amount whatsoever received from the spouses of any of these persons would also be completely exempt from income tax. For example, if Mr. A receives a gift of Rs. 200,000 in cash from his maternal uncle, that is, his mother's brother, it would be exempt since the maternal uncle would be brother of the parent of the individual concerned and would come within clause (iv) of the aforesaid Explanation. Hence, whenever you receive any gifts from relatives you must carefully apply the test to ascertain whether the person concerned falls within one of the seven categories of "relatives" or not. If a person who makes a gift does not fall within any of the above categories, then he would be considered as a non-relative and gifts from such people would be exempt only up to the extent of Rs. 50,000 in a financial year. It may be noted that since a Hindu Undivided Family can't have relatives, any gifts received by it in excess of Rs. 50,000 in a year would be liable to full income tax.

Tax-Smart 1: Exemption for Marriage Gifts
One very happy feature of the provision of of gifts is that any gift received from any person on the occasion of the marriage of the gift's recipient would not be liable to income tax at all. There is no monetary limit attached to this exemption, which is provided by the proviso to Section 56(2)(vi). However, it is not made clear by this provision whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should suffice if the gift is given just on the occasion of the individual's marriage, which means either on the day of the marriage itself or a day or two before or after. Practical common sense view would prevail in such cases.

Tax-Smart-2: Tax-Exempt Gifts from Other Persons
Besides gifts received from a relative or on the occasion of an individual's marriage, the following are the other gifts which are completely exempt from tax as provided in the proviso to Section 56(2)(vi) of the I.T. Act:
1. Gift received under a Will or by way of inheritance;
2. Gift in contemplation of death of the donor;
3. Gift from any local authority;
4. Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C); and
5. Gift from any trust or institution, which is registered as a public charitable trust or institution under Section 12AA.
Thus, scholarships, stipends or charities received from a charitable institution would be completely exempt from income tax in the hands of the recipients without any limit provided the trust or institution giving the charity is registered under Section 12AA. Likewise, all gifts under a Will, and all amounts received on the death of a person as a part of the inheritance are fully exempt from income tax.

Tax-Smart 3: Gifts in Kind are Tax-Exempt
Here is a point which should be very carefully noted that the provisions relating to taxation of gifts from non-relatives and non-specified persons in excess of Rs. 50,000 would be liable to income tax only when the gift is a sum of money, whether in cash, by way of cheque or a bank draft. Thus, gifts in kind such as a gift of shares, gift of land, gift of house, gift of units or mutual funds, jewelery, etc. would not be liable to any income tax at all. A proper knowledge and understanding of the provisions of Section 56(2)(vi) relating to gifts is very helpful in order to get full tax-exemption in respect of gifts received during a financial yearChanges Proposed In new Budget 2009 from 01.10.2009Individuals receiving shares, jewellery, valuable artefacts or even property valued at over Rs 50,000 as gifts from non-relatives, will have to start paying tax from October 1,2009 The budget has extended the provision to tax cash gifts in the hands of the recipient to all non-cash gifts as well. These will include shares, jewellery, archaeological collections, valuable drawings, paintings or sculptures. If the value of these assets exceeds Rs 50,000, it will be treated as income for the recipient and taxed according to his or her taxslab. Not just this. Realty deals among nonrelatives for “inadeaqute consideration” will also come under the tax net, going by the finance bill 2009. If the property is sold for a song, tax will be imposed on the difference between the state government notified rate and the purchase price. Again, the recipient will have to pay tax. For jewellery or valuable artifacts, received from a non-relative for little or no consideration, a fair market value will be arrived at to determine the tax liability in the hands of the recipient.So above Tax smart Tip3 is effective only up to 30.09.2009.and from 01.10.2009 ,gift in kind from non relative will also be considered towards 50000 Limit /pa.

Thursday, July 9, 2009

Imposition of service tax on Builders

F. No. 137/12/2006-CX.4
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs
***
New Delhi, dated 29th January 2009
Subject: Imposition of service tax on Builders - regarding

************

Construction of residential complex was brought under service tax w.e.f.01.06.2005. Doubts have arisen regarding the applicability of service tax in a case where developer / builder/promoter enters into an agreement, with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. The ‘Construction of Complex’ service has been defined under Section 65 (105)(zzzh) of the Finance Act as “any service provided or to be provided to any person, by any other person, in relation to construction of a complex”. The ‘Construction of Complex’ includes construction of a ‘new residential complex’. For this purpose, ‘residential complex’ means any complex of a building or buildings, having more than twelve residential units. A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.

2. A view has been expressed that once an agreement of sale is entered into with the buyer for a unit in a residential complex, he becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit is a service of ‘construction of residential complex’ to the customer and hence service tax would be applicable to it. A contrary view has been expressed arguing that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit, the transaction of sale is completed only after complete construction of the residential unit. Till the completion of the construction activity, the property belongs to the builder or promoter and any service provided by him towards construction is in the nature of self service. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of ‘residential complex’ as defined for the purposes of levy of service tax and hence construction of it would not attract service tax.

3. The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.

4. All pending cases may be disposed of accordingly. Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.

Wednesday, July 8, 2009

Sub Prime ; How and Why

What is a sub-prime loan?

In the US, borrowers are rated either as ‘prime’ - indicating that they have a good credit rating based on their track record - or as ‘sub-prime’, meaning their track record in repaying loans has been below par. Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorised as sub-prime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers.

In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses.With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment.

Since the risk of default on such loans was higher, the interest rate charged on sub-prime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of sub-prime borrowers defaulting. The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default.

Further, lenders devised new instruments to reach out to more sub-prime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised , they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years.

The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value.Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.

One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on.

As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down. Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed more than half of the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant that they too had to suffer losses — $14 billion combined in the last four quarters - because of declining prices for their collateral and increased default rates.The forced retreat of these two mortgage giants from the market, of course, only adds to every other player’s woes.

Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn). A little more than half of these losses, or $260 bn, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 bn by Asian ones. Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world’s largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed.

The crisis has also seen Lehman Brothers - the fourth largest investment bank in the US - file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalised to prevent them from going under.Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 bn bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector.

Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities.

Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.

Monday, July 6, 2009

New Income Tax Rate slabs for Individual, HUF, Women, Senior Citizen for A.Y. 2010-11 & F.Y. 2009-2010

Basic exemption for individual tax payers was increased by Rs 10,000 for general tax payers and women and Rs 15,000 for senior citizens (i.e. 65 years and above) by the finance minister on Monday.
The current income tax exemption limit is Rs 1.5 lakh (Rs 150,000) for men, Rs 1.8 lakh (Rs 180,000) for women and Rs 2.25 lakh (Rs 225,000) for senior citizens.
Finance Minister Pranab Mukherjee removed the surcharge on income above Rs 10 lakh (Rs 1 million) for personal income tax payers. The surcharge was levied at the rate of 10 per cent on income above Rs 10 lakh.

Income tax slab tables for your quick reference

India Income tax slabs 2009-2010 for Men
Income tax slab (in Rs.) Tax
0 to 1,60,000 No tax
1,60,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%

India Income tax slabs 2009-2010 for women
Income tax slab(in Rs.) Tax
0 to 1,90,000 No tax
1,90,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%

India Income tax slabs 2009-2010 for Senior citizen
Income tax slab(in Rs.) Tax
0 to 2,40,000 No tax
2,40,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%

Amendment in TDS rates and Provisions U/s. 194C & 194I of the Income Tax made in Finance Budget 2009-2010

194C- Under this section earlier there was same Rate of TDS in respect of Payment to all the class of the Assesses. Now finance minister has changed the rates and provided that that any person shall deduct tax at source at the rate of one per cent,if the payee is an individual or a Hindu undivided family or at the rate of two per cent. in the case of any other person, on payment to a resident contractor for carrying out any work.

194-I- Under this section Earlier TDS was required to be deducted @ 10% if the same was in respect use of any machinery or plant or equipment this rate is now been reduced to 2% w.e.f. 01.10.2009. Earlier there were two rates in respect of use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings at the rate of fifteen per cent for the where the payee is an individual or a Hindu undivided family and twenty per cent, where such payee is a person other than an individual or a Hindu undivided family. Now there is a uniform rate of 10% in respect of Payment for use use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings for type of Assesses.

Highlights of the budget 2009-10 as applicable to service tax
Jul 7, 2009 Service Tax

I. NEW SERVICES UNDER THE TAX NET
1) Medical Services

Services of cosmetic surgery or plastic surgery (zzzzk). However surgery undertaken to restore or reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, degenerative diseases, injury or trauma shall be exempt.

2) Transport other than surface transport

The following Transport services in relation to transport under sub clause (zzzzl) have been made taxable
(i) Coastal goods;
(ii) Goods through national waterway; or
(iii) Goods through inland water.

3) Legal consultancy service
Any advice, consultancy or assistance in any branch of law provided by a business entity to any other business entity. Any service provided by way of appearance before any court, tribunal or authority shall not be treated as taxable service. Business entity does not include and Individual. (zzzzm)
(Important: The above changes will come into effect from a date to be notified, after the enactment of Finance (No. 2) Bill, 2009.)

II. EXTENTION OR ALTERATION OF SOME EXISTING SERVICES

1) The services of sub-broker covered under Section 65(105)(a) have been exempted from service tax.

2) Transportation services (zzzp) in relation to transport of goods by rail has been made taxable.Presently, transportation of goods in containers by rail, by other than Government railways is taxable under section 65(105)(zzzp) since 2006. It is now proposed to impose service tax on goods transported by railways including Government railways, whether in containers or otherwise. Suitable abatement and exemption is expected soon.
Important: Railway Minister Ms. Mamta Benegri budgeted NO INCREASE IN RAILWAY FREIGHT. However the Finance Minister has levied 10% Service Tax on freight of railways. This levy is bound to lead to inflation as the prices of all the goods required for infrastructure development like Cement, Iron & steel etc. are bound to increase. Moreover the Petroleum Minister has already hiked the fuel prices. Is this the way our government plans to provide a booster to the economy ?.

3) “Under Business Auxiliary Service” only those processes, which result in the manufacture of ‘excisable goods’ shall henceforth be excluded from the purview of BAS. Processes resulting in manufacture of goods which are not excisable shall now not be exempt from service tax.

4) The definition of Information Technology Software Service has been altered so as to shift the base of taxation from “Acquition “ of the right to use information technology software service for commercial exploitation to the “Provision” of the same. (w.e.f. 16-05-2008) (The amendment was necessary ab initio as it was an inadvertent mistake)

(The above changes will come into effect from a date to be notified, after the enactment of Finance (No. 2) Bill, 2009.)

III. RESTRICTIONS/EXENTION OF POWERS
a) At present under section 84 of the Finance Act 1994 the Commissioner of Central Excise has the power of revision of O-I-O passed by an adjudicating authority subordinate to him.This provision now stands abolished and in its place a provision has been made for filing departmental appeals before the Commissioner (Appeal).

b) Section 94 of the Finance Act 1994 has been amended to empower the Central Government to frame rules with respect to the place of provision of taxable services; and with respect to the relevant date for determination of the rate of service tax. (These powers are not available as yet).

(The above changes would come into effect from the date of the enactment of the Finance (No. 2) Bill, 2009.

IV. AMENDMENTS IN THE RULES AND EXISTING NOTIFICATIONS
1) By notification No. 1/2002–ST dated 01.03.2002 the Central Government exempts the taxable services provided, by Government of Rajasthan under Group Personal Accident Scheme, to its employees in relation to general insurance business, from whole of the service tax leviable thereon under section 66 of the said Act. The scope of this notification has been enlarged by extending the applicability of service tax provisions to installations, structures and vessels in the entire Continental Shelf of India and Exclusive Economic Zones of India. (Noti.No. 21/2009-07-07-2009).

2) At present there is a provision in Rule 5B in the Cenvat Credit Rules 2004 that If the value of any,input, or capital goods before being put to use, on which cenvat has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the manufacturer shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods .

3) This rule has been amended to make it applicable to a SERVICE PROVIDER also.(Earlier it was restricted to only manufacturer under the Excise Acts and not to Service Providers ).

4) An assessee providing both taxable and exempted services, who does not maintain separate accounts of inputs shall now pay an amount equal to 6% of the value of exempted services instead of 8%.

5) An assessee enjoying the benefit of optional composition scheme has now got a rider. At present the works contractor has the option of either paying 10% of the service element in the value of the contract or pay 4% on the gross amount charged for the contract.This benefit shall now be available only to such works contracts where the taxpayer declares the entire value of goods and services used in the execution of the works contract as the ‘gross value’charged for the works contract.The gross value shall not include VAT on transfer of materials and the cost of capital assets (except hire charges, in case of hire) . This benefit of composition shall be permissible only where the declared value of the works contract is not less than the gross amount charged for such works contract.

(This restriction would not apply to current works contracts where either the execution has commenced or any payment has been made on or before 07.07.2009.
The changes mentioned in S. Nos. (1) to (4) above will come into effect immediately.

6) Goods Transport Agents (GTAs) receive several services from other service providers (such as warehouse keeper, cargo handlers, C&F agents) during the movement of goods, en-route. While these individual services are taxable at the hands the service providers, the GTA cannot take credit of tax paid on such services, as the abatement allowed to them is subject to condition that no credit should be availed. This exemption given to persons providing specified services to goods transport agency is being given retrospective effect from 1st day of January, 2005.(This exemption will come into effect the date of enactment of Finance Bill, 2009). This provision is being given effect to through the Finance (No. 2) Bill, 2009 and will come into effect from the date of enactment of the said Bill. The services covered are as under:
(j) Clearing and forwarding agent
(k) Manpower recruitment or supply agency
(zr) Cargo handling agency
(zza) Storage or warehouse services
(zzb) Business auxiliary service;
(zzzf) Packaging activity;
(zzzq) Support services of business or commerce
(zzzzj) Supply of tangible goods without transferring possession or control

V. NEW EXEMPTIONS
a) Exemption from service tax (leviable under Club or Association Service (zzze) ) is being provided to the Federation of Indian Export Organizations (FIEO) and specified Export Promotions Councils. The exemption is valid till 31.03.2010. (Noti. 16/2009/07-07-09)
b) The following taxable services received by an exporter of goods and used for export of goods shall be fully exempt (.i.e.100% exemption) from the charge of service tax subject to conditions specified in the notification. (Notification No.17/2009 – Service Tax (07-07-09))
Sr.No.
Sub-Clause
Taxable Services
1. (d) General insurance business
2. (zn)&(zzl) Port Services
3. (zzh) Technical Testing & Analysis
4. (zzi) Technical inspection and certification
5. (zzp)&(zzzp) Transport services from inland container depot to port/airport
6. (zzzd) Specialized Cleaning Services.
7. (zza) Storage & Warehousing Services
8. (f) Overseas Courier Services
9. (h) Custom House Agent Services
10. (zm) & (zzk) Collection of export bills, Forex changing, Letter of credit
11. (zzzzj) Supply of tangible goods without transferring possession or control
12. (j) Clearing & Forwarding Agent Services
13. No Specific Clause

Terminal Handling Services
Conditions:
(a) The exemption shall be claimed by the exporter for the specified service received and used by him for export of the said goods
(b) The exemption claimed by the exporter shall be provided by way of refund of service tax paid on the specified service used for export of the goods.
(c) The exporter claiming the exemption has actually paid the service tax on the specified service to its provider.
(d) No CENVAT credit of service tax paid on the specified service used for export of the goods has been taken under the CENVAT Credit Rules, 2004;
(e) The claim for refund shall be filed within one year from the date of export of the goods.
(f) No refund claim shall be allowed if the same is for an amount less than rupees five Hundred.
(g) If the total amount of refund sought under a claim is upto 0.25% of the total FOB Value of export, then the claim documents can be self certified.
(h) If the total amount of refund sought under a claim is more than 0.25% of the total FOB Value of export, then the claim documents shall be certified by the statutory auditors /Tax auditors of the company.
(i) If any refund of service tax has been given but the sale proceeds in respect of the goods have not been realised within the period allowed under FEMA then such service tax refunded shall be recoverable.
c) The following taxable services received by an exporter of goods and used for export of goods shall be fully exempt (.i.e.100% exemption) from the charge of service tax subject to conditions specified in the notification. (Notification No.18/2009 – Service Tax (07-07-09))
Sr.No.
Sub-Clause
Taxable Services
1. (zzp)
Transport services from inland container depot to port/airport
2. (zzb) Overseas Commission Agent
Conditions:
(a) The exporter shall produce consignment note in his name.
(b) The commission shall not exceed 1% of the FOB value
(c) The export documents shall be issued in the name of the exporter, showing that the exporter is liable to pay the service tax .
(d) The exporter shall not take Cenvat credit of the service tax paid on the specified services used for export of the goods under the CENVAT Credit Rules, 2004;
d) The taxable services of Banking and Financial institution in relation to banking and other financial services (zm) and
e) Foreign exchange broker services (zzk)
provided to a Scheduled bank, by any other Scheduled bank, in relation to inter-bank transactions of purchase and sale of foreign currency, are exempt from the whole of the service tax leviable thereon under section 66 of the said Finance Act. Notification No.19/2009 – Service Tax (07-07-09)
f) The services provided by the tour operators undertaking point-to-point transportation of passengers in a vehicle bearing contract carriage permit is being fully exempted from service tax, provided such transportation is not in relation to tourism or conducted tours, or charter or hire( Notification No.20/2009 – Service Tax (07-07-09)
g) By notification No. 1/2002–ST dated 01.03.2002 the Central Government exempts the taxable services provided, by Government of Rajasthan under Group Personal Accident Scheme, to its employees in relation to general insurance business, from whole of the service tax leviable thereon under section 66 of the said Act. The scope of this notification has been enlarged by extending the applicability of service tax provisions to installations, structures and vessels in the entire Continental Shelf of India and Exclusive Economic Zones of India. (Noti.No. 21/2009-07-07-2009)

VI. REFUND SCHEME FOR EXPORTERS

Notification No. 41/2007-ST dated 06.10.2007 provides for refund of service tax paid on services, which though not in the nature of input services, are relatable to export of goods. The scheme is being revamped to ensure speedier grant of refunds to the exporters. The salient features of the new scheme, being notified under two notifications, both dated 07.07.2009, are as follows:
(a) Two taxable services, namely, ‘Transport of goods by road’ and ‘Commission paid to foreign agents’ have been exempted from the levy of service tax, if the exporter is liable to pay service tax on reverse charge basis. However, as the present cap of 10% on commission agency charges has been retained, the exporter will have to pay service tax on the amount of commission which is in excess of 10%.
(b) Terminal Handling Charges’ is being added to the list of eligible services.
(c) The time period for filing a refund claim is being increased to one year from the date of export.
(d) The condition for filing refund claims once in a quarter is being dispensed with. Now the exporter can file a refund claim anytime after each export shipment.
(e) Self-certification is being introduced to ensure faster sanction and disbursement of refunds. In a case, where total amount of refund claim does not exceed 0.25% of the total f.o.b. value of exports under a claim, a self-certification by the exporter on the relevant documents to the effect that: (a) the eligible services have been received by him; (ii) the service tax payable thereon has been reimbursed; and (iii) such services have been used for the export, would be sufficient.
(f) The refunds shall be granted within one month without any pre-audit.
(g) In a case, where amount of refund claim exceeds 0.25% of the f.o.b. value of exports, the documents submitted by the exporter should be certified by the chartered accountant, who audits his annual accounts. On the basis of such certification, the refund claim shall be sanctioned within one month without any pre-audit.

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