SRD Legal - TAX Update Issue 2 - 20150916

A

TAX Update Newsletter on Indirect Taxes

GST Central Excise

Service Tax Customs

Foreign Trade

September, 2015

Issue 2

TAX Update – Issue 2, Sept 2015

2 SRD Legal, Advocates & Consultants

Dear Readers,

Greetings from Team SRD Legal.

It is heartening to note that the first issue of

‘TAX Update’ has been widely appreciated by

the readers. We have also received several

suggestions.We are thankful for your

overwhelming response and valuable feedback.

The Central Government has not introduced

any significant amendments/changes in the

last fortnight. Our colleague Raymond George

has used this opportunity to write an article on

‘Goods & Services Tax’ (GST) providing an

overview of the basic concept/ salient feature of

the proposed scheme.

Kindly mail your suggestions to

[email protected] to make this newsletter more

relevant and useful.

Manoj Kasale Advocate

16th September, 2015

In this issueIn this issueIn this issueIn this issue

• GST – An introduction

• Cenvat Credit when DTA unit coverts

into EOU

• Valuation – supply against invalidated

Advance Licence

• Cenvat Credit when capital goods are

neither owned nor taken on lease

• Manufacture – sterilisation of syringes &

needles and packing

• Service Tax – when service is rendered

free

• Refund – unjust enrichment – when total

receipt is computed as cum-tax

• Customs Valuation when goods are short

received in India

• Customs Valuation – CVD on Retail Sale

Price

• SFIS – Only Indian brands are eligible

Photographs in this issue have been

contributed by Bhavya Sharma from

Budapest, Hungary.



GST: An Introduction

By Raymond George, Advocate

GST is an idea whose time has come.

Though it seems difficult for the

Government to introduce it from 1st

April, 2016, yet, it is evident that in

coming days the efforts would be

intensified and the law would see light of

the day.

The multiplicity of taxes and multiplicity

of tax authorities is a nightmare for the

industry. The illusive line of distinction

between goods and service has led to

several litigations and has done

considerable damage to industry. In

certain sectors there remains a perpetual

dilemma as to whether to pay VAT or

Service Tax or both. GST promises to

merge several taxes into one and to

reduce complexities of procedures &

documentation. This promise makes it

the most eagerly awaited tax reform.

GST would be a single tax replacing

several Central and State taxes. The

broad idea is to levy a single tax at all

stages of supply right from

manufacturer/ service provider to the

retailers, allowing a continuous chain of

credit at each stage. Three main taxes to

be merged into GST are C. Excise,



Service Tax and VAT. From the

consumer point of view, it will reduce the

overall tax burden on the goods, which is

currently estimated to 25 to 30%. GST

would be useful to the assessees as it

would make the Indian products

competitive in domestic and

international market. Being a single tax,

the assessees would be free from taking

multiple registrations, filing of multiple

returns etc. It will also reduce the

number of documents, records and

procedures. Comparative simplicity of

procedure is likely to reduce litigations.

It will also increase the pace of business.

It is estimated that GST will result into

1.5% to 2% growth in GDP.

Taxes to be merged into GST1: About

17 taxes presently levied by the Central

and the State Governments are proposed

to be subsumed into GST. These are as

under:

[A] Taxes presently levied by Central

Government

(i) Central Excise duty

(ii) Duties of Excise (Medicinal and

Toilet Preparations)

(iii) Additional Duties of Excise

(Goods of Special Importance)

(iv) Additional Duties of Excise

(Textiles and Textile Products)

(v) Additional Duties of Customs

(commonly known as CVD)

(vi) Special Additional Duty of

Customs (SAD)

(vii) Service Tax

(viii) Cesses and surcharges insofar

as far as they relate to supply of

goods or services

1 ‘GST – Concepts & Status’ issued by CBEC

[B] Taxes presently levied by State

Government

(i) State VAT

(ii) Central Sales Tax

(iii) Purchase Tax

(iv) Luxury Tax

(v) Entry Tax (All forms)

(vi) Entertainment Tax (not levied

by the local bodies)

(vii) Taxes on advertisements

(viii) Taxes on lotteries, betting and

gambling

(ix) State cesses and surcharges

insofar as far as they relate to

supply of goods or services.

Proposed Model of GST

1. In case of transactions within a state,

the GST would be split into following

two

- Central GST (CGST)

- State GST (SGST)

Both the above taxes would be levied

on a single base. Thus, the invoice

would look like:

Value: Rs. 1000/-

CGST: Rs. 10/- (assuming rate as 10%)

SGST: Rs. 10/- (assuming rate as 10%)

Please note that both the taxes are

calculated on the same value of Rs.

1000/-.

2. In case of interstate transactions the

GST would be called Integrated GST

(IGST) and the rate would be a

combined rate of CGST & SGST. The

invoice would look like:



Value: Rs. 1000/-

IGST: Rs. 200/-

Thus, the rate of GST would remain

constant irrespective of whether the

transaction is intrastate or interstate.

3. IGST would also apply on imports

from outside India. This will replace

CVD (presently equal to C. Excise

Duty) and the Special Additional Duty

(presently @4%).

4. Rate of GST is yet to be decided.

Finance Minister has indicated that

the rate would be within 20% (total of

CGST & SGST).

5. A notable feature of GST is merger of

the taxable events.

Tax Taxable Event

C. Excise Manufacture

Service Tax Provision of service

VAT/ CST Sale of goods

GST Supply of Goods or

Services

This will eliminate the disputes as to

whether the process amounts to

manufacture or not; whether the

transaction is of goods or service etc.

6. GST would be levied at all levels i.e.

on manufacturers, wholesale dealers,

retailers etc.

7. Input Tax Credits would be available

at all levels.

Credit of Can be utilized to pay

CGST CGST, and then IGST

SGST SGST, and then IGST

IGST IGST, then CGST, and

then SGST

8. A threshold turnover would be fixed,

below which GST will not apply.

Presently it is being debated whether

the limit should be Rs. 10 lakh or 25

lakh. Persons having turnover below

this limit won’t have to charge/pay

GST.

Distortions:

From the current debate it also appears

that the ultimate model will have some

distortions. For instance:

a. The rates for goods and service are

being kept different. This will take

away one of the major reliefs

expected from GST. It means that

the dispute as to whether the

transaction is of goods or of service

will continue.

b. The government is contemplating

levy of 1% Tax on interstate

transactions without allowing

credit to the receiver.

c. State Governments are being

given power to vary the rate of

CGST. This will lead to different

rates of GST in different states.

d. GST won’t apply to petroleum

products. Thus the chain of credit

would break leading to increase in

cost.

e. Credit of GST on real estate may

not be available.

We shall provide you further information

in due course. We also propose to conduct

lecture sessions with a view to create our

preparedness for the new taxation

regime. I welcome your views on

[email protected].



News

Constitution of New Regional Bench of CESTAT at Allahabad

[Notification No.01/2015 dated 14.08.15 by CESTAT, New Delhi]

A new Regional Bench of CESTAT has been constituted at Allahabad (Uttar Pradesh).

This bench will hear all appeals arising from territories within the State of Uttar

Pradesh. It has already started receiving new appeals w.e.f. 01/09/2015. Also all pending

appeals would also be transferred from Delhi to Allahabad Bench.

One of our clients sought clarification as to whether the Allahabad will hear only C.

Excise cases. It is clarified that the bench would cases relating to C. Excise as well as to

the Service Tax and Customs Law.

Case Laws

Central Excise

Cenvat Credit does not lapse when a

DTA unit is converted into EOU:

A DTA unit converted itself into EOU

with effect from 04/07/2007. On that

date the DTA unit had a Cenvat Credit

balance of Rs. 1.21 Crores. Relying on

Circular no. 77/99-Cus, the department

contended that the said credit would

lapse when the unit converted itself into

EOU. Relying on an earlier decision, the

Hon’ble Tribunal decided the matter

against the department holding that:

a. There is no bar for transfer of

credit available in the books of

accounts on the date of conversion

of a unit in DTA into 100% EOU

under Rule 10 of the Cenvat

Credit Rules, 2004.

b. The Board Circular no. 77/99-Cus

quoted does not elaborate under

what provision the unutilised

credit will stand lapsed. In any

case, the said circular was issued

when Rule 100H under old

Central Excise Act, 1944 (sic)

were existing and at that point of

time 100% EOU were outside the

scheme of modvat/Cenvat Credit,

which is not so after the CENVAT

Credit Rules, 2004 have come into

existence.

Privi Organics Ltd. v. CCE, Raigad

2015-TIOL-1859-CESTAT-MUM



Valuation - Deemed Export benefits

are ‘additional consideration’:

This judgment dated 21/08/2015 of

Hon'ble Supreme Court is notable by all

who are obtaining deemed export

benefits.

The holder of the advance licence is

entitled to import raw material duty free

for manufacture of finished goods.

However, the licence holder has an

option to procure the goods indigenously.

To procure the goods locally, the license

holder gets the licence invalidated for

import. Upon such invalidation, the

indigenous supplier becomes entitled to

obtain advance intermediate licence/

duty drawback.

In the instant case, the assessee offered

a lower price to the buyers who agreed to

surrender the licence. The Hon’ble Apex

Court held that

a. The benefit derived from

surrendering of advance license is

an “additional consideration” and

hence would become part of the

assessable value.; and

b. The ‘additional consideration’

flows indirectly from the buyer.

CCE, Nagpur vs. Indorama Synthetics

(I) Ltd. – Judgment dated 21/08/2015 in

Civil Appeal No. 1834 of 2006.

Credit on Capital Goods – Credit

available even if the Capital Goods

is not owned

The manufacturer was manufacturing

plastic goods by using injection moulding

machines. The moulds were supplied by

the original equipment manufacturer.

The department objected to the credits

on the ground that the assessee was

neither owner of the capital goods, nor

had it obtained it on lease or hire

purchase agreement.

Hon'ble Bombay High Court held that

there is no requirement under the rules

that the capital goods shall either be

owned by the assessee or those shall be

acquired by finance from financing

agency.

CCE, Raigad vs. Modernova

Plastyles Pvt. Ltd. – Judgment dated

21/02/2015 in C. Excise Appeal no. 27 of

2004.

Manufacture – disposable syringes -

Mere sterilization and packing of

syringes & needles does not amount

to manufacture:

This judgment is of great help to

understand as to what amounts to

manufacture and what does not.

The appellants purchased syringes and

needles in bulk from the open market.

They would then sterilize the syringes

and the needles and put one syringe and

one needle in an unassembled form in a

printed plastic pouch. The plastic

pouches so packed were sold under a

brand name.



The department claimed that

sterilization brings about a change in the

character of the final product, which now

becomes disposable syringes and

needles. Therefore, a new commodity

having a different character has come

into existence. Thus, it was claimed that

the process amounts to manufacture and

duty is payable.

Reversing decision of the Tribunal,

Hon'ble Supreme Court held that the

activity does not amount to

manufacture. It observed that:

a. There is distinction between

manufacture and marketability.

b. Manufacture takes place on the

application of one or more

processes. Each process may lead

to a change in the goods, but every

change does not amount to

manufacture. There must be

something more - there must be a

transformation by which

something new and different

comes into being, that is, there

must now emerge an article which

has a distinctive name, character

or use.

c. There is no transformation of one

product into another. When a

finished product cannot

conveniently be used in the form

in which it happens to be, and it is

required to be changed into

various shapes and sizes so that it

can conveniently be used, no

transformation takes place if the

character and the end use of the

first product continue to be the

same. The Hon'ble court noted

certain judgments as illustrations:

i. Cutting of jumbo rolls of

tissue paper into various

shapes and sizes so that

they could be used as table

napkins, facial tissues and

toilet rolls, does not amount

to manufacture as the

character and the end use

of the tissue paper in the

jumbo roll and the tissue

paper in the table napkin,

facial tissue and toilet roll

remains the same.

ii. Removal of impurities from

transformer oil so as to

make it usable again, is not

manufacture.

iii. Putting different articles of

feeding bottles (viz. bottles,

feeder nipples, bottle lids

and plastic parts) together

in a combined pack after

sterilisation and selling it

under a name, does not

amount to manufacture as

the process does not bring

into existence any new

product.

d. The essential character remains

the same.

e. The process would not amount to

manufacture merely because the

unsterilized syringe and needle is

of no commercial use without

sterilization. There has first to be

a transformation in the original

article which transformation

brings about a distinctive or

different use in the article. Then

only the test of commercial use

would apply.



Summarizing various case laws, the

Hon'ble Court said that these fall into

four neat categories and held that the

processes in the first three categories do

not amount to manufacture:

(1) Where the goods remain

exactly the same even after a

particular process.

(2) Where the goods remain

essentially the same

(3) Where the goods are

transformed into something

different and/or new, but the

said goods are not marketable.

(4) Where the goods are

transformed into goods which

are different and/or new after

a particular process, such

goods being marketable as

such. It is in this category that

manufacture of goods can be

said to take place.

Servo-Med Ind. Pvt. Ltd. vs. CCE,

Mumbai - 2015 (319) ELT 0578 (S.C.)



SERVICE TAX

Service tax not payable when the

service is rendered free of cost.

Appellants received purchase order for

Rs. 670 lakh for supply of stone crushing

plant and to provide supervision of its

erection and commissioning. As per the

purchase order, the appellant was

required to provide the said supervision

‘free of cost’.

The department demanded Service Tax

on the ‘erection and commissioning’

service.

The Hon’ble Tribunal on the perusal of

the purchase order observed that

- Essentially the purchase order

was for supply of stone crushing

plant. (Implying that such

supervision of erection and

commissioning has to be treated

as part of sale); and

- Even if it is held that there was a

service component in the form of

supervision of erection and

commissioning of the plant

supplied, the said service was

manifestly rendered free of cost

and thus no service tax liability

can arise

Larsen & Toubro Ltd. vs. CCE, Bhopal

2015-TIOL-1847-CESTAT-DEL.



Refund – Unjust Enrichment –

Hazard of computing tax

This judgment needs to be noted by all

who agree to pay Service Tax or C.

Excise duty under pressure from officers

even when they hold a bona fide view

that tax/ duty is not payable. Please see

how the appellant lost the refund.

The appellant was of the view that it was

not required to pay service tax. It did not

charge the tax to its clients. However,

under pressure from the department it

paid tax of Rs. 4.20 Crores and later

claimed refund.

Authorities agree that tax was not

payable. Yet, the refund has been denied

even by the Tribunal. Reason – unjust

enrichment. It is a principle that one

cannot obtain refund of tax from

government if he has recovered the

amount from another person.

Though the appellant had not charged

service tax to its customer and had

asserted from the very beginning that

tax was not payable, yet the Tribunal

has held that he has recovered the tax

from his client. This conclusion has been

drawn because while paying the tax

(under pressure from the department),

the appellant computed the tax in such a

manner that the amount received from

its customers as ‘cum-tax’ i.e. he adopted

the formula:

Amount recovered from customers =

Value of service + Service Tax.

Because of this, the Tribunal has

concluded that “the amount which has

been billed by the appellant to their

customers and paid by their customers

includes service tax liability and the

same has to be held as being passed on to

the customers.”

Hardesh Ores Pvt. Ltd. vs. CCE [2015-

TIOL-1872-MUM]



CUSTOMS

Valuation - Duty is payable on the

quantity received in India and not

on quantity exported from another

country.

The Hon’ble Supreme Court in this

recent judgment has held that duty is

payable on the quantity received in India

and not on quantity exported from

another country. The Hon’ble Apex

Court held that if the goods are pilfered

after they are unloaded or lost or

destroyed at any time before clearance

for home consumption or deposit in to a

warehouse, the imported is not liable to

pay duty leviable on such goods. The act

of importation is complete only when an

order for clearance for home

consumption or an order permitting

deposit of goods in a warehouse is made.

The court has further observed that

under Section 23(2), an importer can

relinquish his title to the goods. He may

abandon the goods even after they are

physically landed in any port before any

order is passed. The court further

observed that under Section 47 of the

Customs Act, 1962, the importer has to

pay customs duty on the goods that are

entered for home consumption. Hence,

the quantity of goods imported will be

the quantity of goods at the time they

are entered for home consumption.

Mangalore Refinery and Petrochemicals

Ltd. v. CC - 2015-TIOL-199-SC-CUS

Valuation – CVD is not payable on

MRP basis when the goods are not

intended for retail sale.

CVD on imported goods is equal to the C.

Excise duty payable on like article if

manufactured in India. Where the C.

Excise duty is payable on Retail Sale

Price (RSP) basis, the CVD is also

payable on RSP basis.

The issue relates to import of Set Top

Boxes (STB) which are installed at the

customer’s premises free of cost. The

department asserted that valuation of

the STBs should be done on MRP basis

for the reasons that:

a. The amount of consideration

charged from the customers at the

time of the installation of the STB

at customers' premises is partly

on account of sale of the STBs.

b. The appellant satisfy the

condition of Notification

RE/44/2000 (issued by DGFT) in

relation to pre-packaged

commodities.

c. The goods are also notified under

Notification No. 49/2008-CE

issued under Section 4A of the C.

Excise Act, 1994.

Hon'ble Tribunal held that two

conditions have to be met for CVD to be

levied on the basis of RSP, namely:



(1) Under Legal Metrology Act it

should be required to declare on

the package the retail sale price

(RSP);

(2) The imported goods must be

specified in the notification

issued under Section 4A(1) of the

Central Excise Act, 1944.

In the present case only the second

condition is satisfied [as the goods are

specified in the notification 49/2008-CE

(NT)]. However, the first condition is not

satisfied because:

a. There is no transfer of property or

hire-purchase system involved nor

there is a system of payment by

instalments. Hence there is no

sale.

b. The definition of sale given in CST

Act cannot be relied upon because

the CVD is to be levied as per

Legal Metrology Act.

c. Section3 of the Legal Metrology

Act clearly provides that in case of

inconsistency with the provisions

of any other Act, the provisions of

the Legal Metrology Act, will

prevail.

d. VAT authorities of Maharashtra

and Bihar have held that the

supply of STBs does not constitute

sale.

e. Retail package is a package

intended for retail sale.

f. Revenue has adduced no evidence

whatsoever to show that the cost

of STBs is being passed on as

service charges.

Bharati Telemedia Ltd. vs. CCE 2015-

TIOL-1863-CESTAT-MUM

Served From India Scheme (SFIS)

Hon’ble Bombay High Court has held

that only “Indian Brands” are eligible for

the benefit of the SFIS. The High Court

while deferring with the Hon’ble Delhi

High Court’s order in Yum Restaurant

case upheld the order passed by

Secretary, Ministry of Commerce &

Industry, Government of India holding

that “Non-Indian Brands” are not

entitled to Duty Credit Scrip under the

Served From India Scheme as they are

not promoting Indian Brands.

(2015-TIOL-2090-HC-MUM-EXIM)



About SRD LEGAL:

SRD LEGAL was established in 2007 by Sanjay Dwivedi, Advocate and has grown

into a team headed by four Advocates. The firm handles litigations on C. Excise,

Service Tax & Customs matters up to High Court. It also renders legal advisory

services.

Contact:

512, Business Park, Citi of Joy,

J. S. D. Road, Mulund (West),

Mumbai - 400 080.

Tel. : +91-22-25 6565 47/ 48

+91- 90048 25702/ 87676 61950

Fax : +91-22-25 6565 49

e-mail: [email protected]

Team SRD Legal

Mr. Sanjay Dwivedi, Advocate – 93204 56555

Mr. Manoj Kasale, Advocate – 96190 29095

Mr. Raymond George, Advocate – 98204 80597

Mrs. Savita Dwivedi, Advocate – 99873 70673

For private circulation only.

© SRD Legal

Disclaimer

The information contained in this publication is intended for informational purposes

only and does not constitute legal opinion or advice. The views & information

contained herein are of general nature and are not intended to address the

circumstances of any particular person or entity. The contents are not comprehensive

or sufficient for taking decisions. Please do not act on the information/ views

provided in this newsletter without obtaining professional advice after a thorough

examination of the facts and circumstances of a particular situation. There can be no

assurance that the judicial/quasi judicial authorities may not take a position

contrary to the views mentioned herein. Although we endeavour to provide accurate

and timely information, there is no assurance or guarantee in this regard.

SRD LEGAL neither accepts nor assumes any responsibility or liability arising from

any decision or action taken or to be taken or refrained to be taken, by anyone on the

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Documents

SRD Legal - TAX Update Issue 2 - 20150916