The Hindu Business Line : Service law conundrums

Andrew Jackson once remarked: “The wisdom of man never yet contrived a system of taxation that would operate with perfect equality.” The levy of service tax in India appears to justify this quote. The T. R. Rustagi Committee recommended that 48 redundant circulars be done away with which the government promptly did. Perhaps, the Committee did not foresee that wordings in circulars and notifications could give rise to litigation. Notification No 21/2003 dated No vember 20, 2003, exempted service tax on payments received in convertible foreign exchange. As is usual with any law, exceptions to the rule are provided upfront which in this case was that the exemption would not be granted in case the funds received are repatriated outside India.

Maersk Case

In Maersk India Pvt Ltd vs CST, Mumbai 2007 (TIOL 885 CESTAT Mumbai), Maersk, which had claimed the benefit of the exemption notification was denied the benefit of exemption notification on the ground that the appellants remitted th e dividend to the shareholders outside India in foreign exchange and this dividend was paid out of net income of the petitioner determined taking into consideration the income from all sources and includes payments received for services rendered. Accordingly, a demand of Rs18.55 crore came to be confirmed along with a penalty imposition of Rs 25 crore and so also an order for recovery of interest.

Before the Tribunal it was argued that a plain reading of the proviso would indicate that only if the entire payment received for the services rendered is repatriated, would the company be covered by the proviso and not otherwise. The Tribunal observed that the appellants had a prima facie case inasmuch as it viewed that as per the proviso only if the entire payment for taxable services rendered had been repatriated, the appellants would be covered by the proviso. Finding that Maer sk was not be hit by the proviso, the Tribunal ordered full waiver of pre-deposit of Service Tax demanded, penalties and interest and granted stay from its recovery till the disposal of the appeal.

CBEC view

Responding to the T. R Rustagi Committee report, the CBEC commented: “As regards the remaining circulars/clarifications/instructions (other than those mentioned above), it is seen that certain portions of some of these circulars relate to the issue of valuation of taxable services. However, any such portion, which is inconsistent with the Service Tax (Determination of Value) Rules, 2006 has already been withdrawn w.e.f. 19.4.2006, vide para 4.1.13 of instruction No. B1/4/2006-TRU, dated 19.4.2006. Therefore, in all cases the value of a taxable service is to be determined strictly in terms of the Service Tax (Determination of Value) Rules, 2006 read with Section 67 of the Finance Act, 1994. As regards the other portions of these circulars, the same are presently under examination by the Board and a decision about their further continuance or otherwise would be taken soon.”

The case of Maersk is one in which the value of taxable service was not disputed but the caveats mentioned were misinterpreted. It would apparently take a while to have a crisp Service Law in India.

(The author is a Hyderabad-based chartered accountant.)

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