Service Tax Case Study: Animation Film Services to Charitable Organisation

Relevant Facts of the case

·         A charitable organisation took technical support and assistance, in return for monetary consideration, from a firm to make an educational animation film.

·         The contract was entered into in the Financial Year 2011-12.

·         A major portion of the consideration in return for services received was paid in the period from March 2012 to 30^th June 2012. However, some payments have also been made after 30^th June 2012.

Applicability w.e.f. 1^st July 2012

With effect from 1^st July 2012, all services, except those which are specifically stated in the negative list are chargeable to service tax. Therefore, the services of making a 3D animation film for the charitable institution will be chargeable to service tax after 01.07.2012.

Applicability prior to 1^st July 2012

Section 65(36c) of the Finance Act, 1994 as amended: "Development and supply of content" includes development and supply of mobile value added services, music, movie clips, ring tones, wall paper, mobile games, data, whether or not aggregated, information, news and animation films.

Section 65(105) (zzzzb) of the Finance Act, 1994 as amended: “Taxable service” means any service provided or to be provided to any person, by any other person in relation to development and supply of content for use in telecommunication services, advertising agency services and on-line information and database access or retrieval services.

From the above definition of “taxable service”, it seems that the intent of the government in introducing this service is to tax the value added services provided only by telecom service providers, advertising agencies, on-line information and database access or retrieval services such as internet or web-site service providers.

Point of Taxation

Notification No. 18/2011-ST, dated 1^st March 2011 brought the Point of Taxation Rules 2011, which came into force from 1^st April 2011, and state:

For the purposes of these rules, unless otherwise stated, “point of taxation‟ shall be determined in the following manner, namely:-

(a) a provision of service shall be treated as having taken place at the time when service is provided or to be provided; and

(b) if, before the time specified in clause (a), the person providing the service issues an invoice or receives a payment, the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the time the invoice was issued or the payment was received, as the case may be, whichever is earlier.

Explanation- For the purposes of this rule, wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

Explanation 2- For the purposes of this rule, in respect of services taxable under section 66A of the Act, the point of taxation under clause (b) shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier.

Therefore, it is clear that the time of provision of service will be the earliest of the following dates:

1.       date on which service is provided (or to be provided)

2.       date of invoice

3.       date of payment received

Conclusion

Since the contract was entered into in the Financial Year 2011-12, and it is assumed that the invoice for the full amount was raised before 1^st July 2012, in our opinion, the technical assistance and support services provided in relation with making a 3D animation film are not chargeable to service tax.

Such opinion is provided on the following basis:

1.       Service tax was not chargeable on the abovementioned service before 1^st July 2012.

2.       The earlier of the following two events occurred on a date before 1^st July 2012:

a.       Invoice raised of full amount against the services provided.

b.   Providing of whole of such service for which payment is being made.

Service Tax: Important Points for Builders & Contractors in the Real Estate Market

The real estate market has been growing rapidly in India for the past one decade. Many residential hubs are being developed not only in and around Delhi NCR, but also at other places in the country, claiming to provide affordable homes to fit the budget of each category of customers and investors. The recent changes in the Service Tax laws to be applicable w.e.f. 1^st July 2012 have brought some points to be noted by the real estate developers, builders and contractors engaged in this industry, so that they ensure proper compliance of law.

Applicability

Service Tax was leviable on construction activities under the following three categories of services until 30-06-2012:

·         Commercial or Industrial Construction Services with effect from 10-09-2004

·         Construction of Complex Services with effect from 16-06-2005

·         Works Contract Services with effect from 01-06-2007.

However, with effect from 01-07-2012 all activities related to construction fall within the purview of the following “Declared Services” under Section 66E of the Act:

Section 66E(b): Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority.

Section 66E (h): Service portion in the execution of a works contract.

With effect from 01.07.2012, the following definition of “Works Contract” as given in Section 65B (54) of the Act is applicable:

"Works Contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

The above definition reveals that scope of works contract has increased immensely, as it now applies to both movable and immovable properties.

Exemption to certain construction activities 

Certain construction activities have been exempted by virtue of entry no. 12, 13 and 14 of Notification No. 25/2012 dated 20-06-2012 with effect from 01.07.2012.

·      Entry No. 12, inter alia, grants exemption to services provided to the Government, a Local Authority or a Governmental Authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession, a historical monument, archaeological site, a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment. Services covered by this entry are exempted only if these services are provided to the Government or Local Authority or Governmental Authority.

·         Entry No. 13, inter alia, grants exemption to services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a road, bridge, tunnel, or terminal for road transportation for use by general public, a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana. In order to avail exemption under entry no. 13 the status of service recipient is insignificant-be it Government, a Local Authority or a Governmental Authority or any other person.

·         Entry No. 14 inter alia, grants exemption to Services by way of construction, erection, commissioning, or installation of original works pertaining to an airport, port or railways, including monorail or metro, a single residential unit otherwise than as a part of a residential complex, Low-cost houses upto a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India. The scope of exemption granted vide entry no. 14 is restricted because it does not cover completion, fitting out, repair, maintenance, renovation or alternation of original works pertaining to any of the specified structures, immovable properties, machineries or equipments.

Exemption to sub-contractor

Exemption has also been provided with effect from 01-07-2012 vide Entry No. 29(h) of Notification No. 25/2012 to sub-contractor providing services by way of works contractor to another contractor providing works contract services which are exempt. This exemption was also available until 30-06-2012 vide. Circular No. 147/16/2011 dated 21-10-2011.

Illustrative list of services in relation to Construction Activities which have become taxable w.e.f. 1^st July 2012

1.       Construction of Boundary Wall

2.       Construction of Parking Area

3.       Services in respect of Cutting of Plots and Development of colonies received by builders

4.       Construction of Residential Complex of units ranging between 2-12 units (more than one unit)

5.       Construction of Private Roads

6.       Construction Services provided to Non-Commercial organisation in respect of buildings which are used for other than Religious Purpose

7.       Services provided in respect of Construction of hospitals to any person other than Government or Governmental Authority or Local Authorities

8.       Services provided in respect of Construction of buildings to be used for the purpose of Education to any person other than Government or Governmental Authority or Local authorities

Valuation of service portion in execution of a works contract w.e.f. 1^st July 2012

Substituted Rule 2A(i) of Service Tax (Determination of Value) Rules, 2006, inter alia, provides that the value of service portion in the execution of a works contract is the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. Alternatively, under foregoing Rule 2A (ii), the aforementioned value will be determined as under:

S. No.	Purpose of the Works Contract	Percentage of total amount deemed as Value of service portion of the Works Contract
(A)	Execution of Original Works	40%
(B)	Maintenance or Repair or Reconditioning or Restoration or Servicing of any goods	70%
(C)	Any purpose other than: (A) & (B) above, including Maintenance, Repair, Completion and Finishing Services [such as Glazing, Plastering, Floor and Wall-Tiling, Installation of Electrical Fittings] of an immovable property	60%

Abatement

Notification No. 26/2012 dated 20^th June 2012 states the relevant abatement scheme, under which there is an abatement of 75% offered in the abovementioned service, details of which are as under:

S.No.	Description of taxable service	Percentage of Taxable portion	Conditions
12	Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority	25%	i.   CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.  ii.   The value of land is included in the amount charged from the service receiver.

The rate of abatement in this case has been kept the same as was prior to 1^st July 2012.

CENVAT Credit

Earlier there was an absolute bar on availment of CENVAT credit. However, after 1^st July 2012, CENVAT credit in respect of capital goods and input services (as defined under rule 2 of CENVAT Credit Rules, 2004) has been allowed. It is to be noted that CENVAT credit in respect of inputs shall not be allowed.

Capital goods                                    CENVAT credit available

Input services                                    CENVAT credit available

Input goods                                       CENVAT credit NOT available

As per definition Of ‘Input Service’ under Rule 2(l) of Cenvat Credit Rules, 2004, credit of service tax paid in respect of following services can be availed and utilized only for paying service tax on such ‘specified services’:

·         Service portion in execution of works contract and Construction Services (includes commercial or industrial construction service, maintenance or repair service)

·         Construction of Complex Service including deemed construction service (as listed under Section 66E-Declared Service)

In simple terms, the nature of input service and output service should be similar.

In case of other input services viz. Manpower supply, legal consultancy, telephone bills, GTA service (up to place of removal), banking or financial services etc., credit can be taken on such services if they are used in providing output service (works contract/construction of complex service).

For example,

A Builder is engaged in providing service of construction of building/flats. Further, the Builder sub-contracts the work of construction to another contractor. In this case Builder is providing output service of works contract/construction of complex service and at the same time availing input service of works contract from contractor. Therefore, the Builder can take the Cenvat Credit on input service and utilize the same in paying its tax liability only for works contract service, maintenance or repair or construction of complex service.

Net Savings for Developers

After 1^st July 2012, the developers shall continue to charge service tax from their customers however; they will now avail CENVAT credit on capital goods and input services, thus making their liability to deposit service tax lesser. The developers will now save an amount equivalent to the CENVAT credit availed.

Illustration

A residential flat is sold by a developer for Rs. 50 lakhs, including land value. Service tax will be calculated on 25% of the sale value @12.36%, which will come to Rs. 1,54,500. This amount will be charged by the builder from his customer.

The developer can claim CENVAT credit on capital goods and input services used by him. Assuming that input capital goods used and input services received to construct the flat are worth Rs. 12 lakhs, CENVAT credit available to the developer @12.36% is Rs. 1,48,320. Therefore, the developer/builder will be required to pay only the balance amount of Rs. 6,180 towards service tax. 

Claim of Cenvat Credit: Whether on due basis or payment basis?

As per Rule 4(7) of Cenvat Credit Rules, 2004, Cenvat Credit in respect of input service shall be allowed on or after the day on which invoice or bill is received, and not on payment basis (as was the case earlier).

This is subject to the following condition:

Ø  payment of value of input service and service tax shall be made within three months of the date of invoice or bill.

If the payment is not made within the prescribed period, Cenvat Credit taken earlier on accrual basis shall be reversed and it can be taken back once payment is made.

Renting of Immovable Property as Output Service

Cenvat Credit of service tax paid on services of Works Contract, Construction of Complex Service, maintenance or repair service cannot be taken and used in paying service tax on ‘renting of immovable property service’ because these services are actually used in construction of immovable property and not directly used in provision of such renting services.

The validity of such disallowance stands because ‘Immovable property’ is neither a ‘good’ nor ‘service’ and cannot be taxed. Even Cenvat Credit Rules, 2004 do not allow the taking of credit in such situation. (Read with Circular No. 98/1/2008 dated 04.01.2008).

Whereas, credit on other input services can validly be taken and utilized accordingly.

Summary of CENVAT Credit

CENVAT Credit on Input Service	Whether CENVAT Credit can be taken against Output Service
	Works Contract (including maintenance or repair)	Construction of Complex	Renting of Immovable Property
Works Contract	Yes	Yes	No
Man Power Supply	Yes	Yes	Yes
Commission/Brokerage		Yes	Yes
Professionals/Legal Consultancy	Yes	Yes	Yes
Telephone Bills	Yes	Yes	Yes
Other Services	Yes	Yes	Yes

Conclusion

The scope of service tax on construction activities has been enlarged with effect from 01.07.2012 because many services which were hitherto outside the tax net, have become taxable with the exception of construction, erection, commissioning or installation of original works pertaining to low-cost houses as mentioned above. On the other hand, CENVAT Credit in respect of “input services” and “capital goods” has been allowed to builders with effect from 01.07.2012. The Valuation of Works Contract Services under substituted Rule 2A of Valuation Rules, 2006 will affect adversely the specified service providers in specific cases.

Listed Companies to Obtain SCORES Authentication by 14th September, 2012

SEBI Complaints Redress System (SCORES) was commenced in June, 2011.

SEBI issued Circular No. OIAE/1/2012, dated 13^th August, 2012 according to which all companies whose securities are listed on various stock exchanges need to comply with the following:

• All companies whose securities are listed on stock exchanges are hereby advised to obtain SCORES authentication by 14^th September, 2012 in terms of the aforesaid circular.
• All companies against whom complaints are pending on SCORES shall take appropriate necessary steps within 7 days of receipt of complaint by the concerned company through SCORES, so as to resolve the complaint within 30 days of receipt of complaint and also keep the complainant duly informed of the action taken thereon.
• In case of failure to comply with the above, SEBI would be constrained to initiate enforcement actions as per the law as may be deemed appropriate.
• The Stock Exchanges are accordingly advised to bring the provisions of this Circular to the notice of all the companies whose securities are listed in the exchange and also to disseminate the same on the website.
• This Circular is issued in exercise of powers conferred under section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of and to regulate the securities market.

Service Tax: Enlarged Scope of Reverse Charge Mechanism w.e.f. 7th August, 2012

Central Government has further enlarged the scope of Reverse Charge/Joint Charge Mechanism by adding the following services within its ambit w.e.f. 7^th August, 2012.

(Notification No. 45/2012-ST and 46/2012-ST both dated 7^th August, 2012)

S.No.	Description of a service	Service Provider	Service Receiver	Nature of Charge	Percentage of  service tax payable by the person providing service	Percentage of service tax payable by the person receiving the service
1.	Services provided or agreed to be provided by a director of a company to the said company	Director	Company	Reverse Charge	Nil	100
2.	Security Services*	Individual/HUF/ partnership firm/AOP	Business Entity registered as body corporate	Joint Charge	25	75
	*“security services” means services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity.