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2013: Indirect Tax Wrap!

Published on Sat, Jan 04,2014 | 16:00, Updated at Mon, Jan 06 at 15:34Source : 

By: Nishant Shah, Partner, ELP

The year 2013 saw an introduction of several measures by the Government, the clear focus of which seemed to be increase in revenue collection and steps towards better tax governance. There have also been key judicial pronouncements on certain contentious issues. This article briefly discusses these developments.  

CBEC Circular dated January 1, 2013 – regarding recovery of tax demands

The beginning of the year was marked by the issuance of Circular 967/01/2013 dated January 1, 2013 by CBEC instructing the Revenue authorities to initiate steps to recover confirmed tax demands (i.e. demands confirmed by an Order of an adjudicating or appellate authority / tribunal) even in instances where stay application was filed with the appellate forum and such stay application remained pending beyond a period of 30 days. The Circular resulted in flurry of recovery measures by the Revenue authorities to ensure maximum revenue collection before the end of financial year. This specifically prejudiced the assessees who had filed their appeals along with stay applications to the appellate forums, but which applications were pending disposal for several practical reasons including the pendency of matters before such forums. A number of Writ Petitions were filed before various High Courts challenging the Circular and the recovery measures by the Revenue authorities, and, in many of these cases the High Courts granted interim protection to the assessees till disposal of their stay applications. The Hon’ble Bombay High Court in Larson & Toubro v. UOI [1], while disposing bunch of such Writ Petitions, held that no recovery proceedings could be initiated pending the hearing and disposal of stay applications, however such protection would not be available where the assessee had adopted dilatory tactics which had resulted in delay in hearing and disposal of the stay application.

Amnesty Schemes

Along with the annual budget announcements, the Service Tax Voluntary Compliance Encouragement Scheme (‘VCES’), 2013 was announced as an one-time scheme to encourage voluntary compliances by defaulting assessees for filing returns and payment of tax dues by making truthful declaration of tax dues pertaining to the period October 1, 2007 to December 31, 2012. The benefit of the scheme was available where the prescribed declarations were filed to the designated authority on or before December 2013 and where in respect of the tax dues no notice or order of determination of liability was issued. As per recent media reports, the scheme has evoked good response and the collections under this scheme are of approximately INR 55,000 Crores [2] till December 20, 2013.

Additionally, an amnesty scheme was announced for closure of cases of default in fulfilment of export obligation under certain export promotion schemes under the Foreign Trade Policy (viz. the advance authorization and the Export Promotion of Capital Goods (‘EPCG’) scheme) on payment of duty and interest within 6 months of the date of notification of the scheme.[3]

Earlier, the validity of amnesty schemes have been challenged as being discriminatory, however, the sustained use of these schemes to raise revenue has continued to reward the exchequer.

Changes to arrest related provisions

In September 2011, the Supreme Court in Om Prakash v. UOI, while dealing with arrest related provisions under the Customs law and Central Excise law, held that the main object of these enactments is recovery of duties and not punishment of persons, and that, the persons arrested under these laws will be entitled to be released on bail. Subsequently, vide the Finance Act, 2013, the arrest related provisions under these laws have been amended to specifically make offences involving duty amounts of more than INR 50 lakhs to be non-bailable, thereby partly overcoming the decision of the Supreme Court (Supra).

Levy of Sales Tax on sale of under-construction property

In Larsen and Toubro Ltd. v. State of Karnataka [4],the Larger Bench of the Supreme Court was considering the much contentious issue of levy of VAT on sale of under-construction property. The dispute was whether the agreement of sale was in the nature of ‘works contract’ carried out by the builder for the buyer. The Supreme Court held that a building contract or any contract to undertake construction qualifies as a “works contract” as defined in Article 366 (29A)(b) of the Constitution. It was held that taxing the sale of goods element in a works contract is permissible even where the goods are incorporated in the property which is sold, provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. This decision confirms the decision of the Supreme Court in K. Raheja Development case [5] and confirms this long drawn battle in favour of the Revenue. This has increased the cost burden on one of the largest and fastest growing sectors in India.

Inclusion of value of ‘free supplies’ in gross amount charged for services.

The Larger Bench of the Tribunal in the case Bhayana Builders Pvt. Ltd. v. Commissioner, wasdealing with the issue of inclusion of the value of ‘free supplies’ provided by the service recipient in the ‘gross amount charged’ for the services of construction of commercial and industrial complex. This decision was passed on reference from a Division Bench in light of conflicting views of the Tribunal. In this case the Larger Bench held in favour of the assessee that free supplies cannot be regarded as non-monetary consideration and cannot be considered as part of the ‘gross amount charged’ for the services.  

Levy of Service tax on revenue sharing arrangements

The Madras High Court has in Mediaone Global Entertainment Ltd. v. CCE [6] upheld the levy of Service tax on revenue sharing arrangements, in the form of profit sharing or any other hybrid versions. In this case the High Court was considering the various modes of transactions between the distributors/ sub-distributors and exhibitors of films. This was one of the issues impacting the media and entertainment sector.

Levy of Service tax on distribution / exhibition of films

Another issue impacting the media and entertainment sector was levy of Service tax on distribution / exhibition of films. The Madras High Court in AGS Entertainment Pvt Lts v. Union of India [7], while considering the validity of Service tax entry of ‘Intellectual Property Services’ in facts of distribution / exhibition of films, held that the levy of Service tax under the said taxing entry is not on the “transfer of right to use the goods” but on “the temporary transfer or permitting the use and enjoyment of a copyright”, and, the temporary transfer of copyright is not within the exclusive power of the State under Entry 54 of List II. It was held that the arrangements involving exhibition of films demonstrates that absolute rights do not get transferred from the producer to distributor as the rights are assigned by the producers to the distributors only for a limited time and area, and the transactions are covered within the scope of the Service tax entry. The decision has sought to delineate the permanent and temporary transfer of copyright by holding that assignment of copyright for a limited time and in respect of limited area would not qualify as a transfer of right to use goods and will be covered under the Service tax levy.

Amendments in Foreign Trade Policy

The annual amendments to the Foreign Trade Policy saw steps taken towards relaxation and streamlining of procedures for the ease of trade and strengthening exports to larger economies to boost international trade. Although the Zero duty EPCG scheme was extended to all sectors, the scheme was made restrictive by the exclusion of (i) exports by group companies and exports of alternate products in fulfilment of the export obligation by the licence holders, (ii) producers and transmitters of energy, and (iii) import of second capital goods.

Certain changes were made in the SEZ law. There was reduction in the minimum land requirement for multi-product SEZ and sector-specific SEZs. Duty benefits similar to any other activity in the SEZ were extended to any additions to pre-existing structures on vacant land. Additionally, the Government also introduced an exit policy for SEZ units, which includes transfer of ownership by way of sale.

Tax Administration Reform Commission

Towards the end of the year, with a view to review and stabilize the tax governance, the Tax Administration Reform Commission (‘TARC’) was set up in the month of August 2013 under the Chairmanship of Advisor to Finance Minister to suggest various measures including appropriate organisational structure for tax governance. The mandate of the TARC includes review of the existing mechanism of dispute resolution, methods to widen tax base, timely disbursal of tax refunds and drawbacks and measures to strengthen inter-agency information sharing within the revenue enforcement divisions [8]. TARC is expected to issue its first report within next six months, which could result in substantial amendments in law or procedures.

To conclude, it can be said that 2013 has been a year wherein the Government has taken measures to augment Revenue collections. Also there have been certain important judicial announcements during the year.

_________________ [1] Dated February 1, 2013


[3] Notification No. 01(RE-2013)/2009-2014 dt. 18.04.2013; Public Notice No. 01(RE-

2013)/2009-2014 dt. 18.04.2013

[4]  2013-VIL-03-SC-LB

[5]  2006 (3) STR 337 (SC)

[6]  2013 TIOL 516 HC MAD

[7]  2013 TIOL 521 HC MAD

[8] Press Information Bureau Government of India, Tax Administration Reform Commission (‘TARC’), New Delhi, October 21, 2013; Asvina 29, 1935

(Anay Banhatti, Senior Associate, ELP also contributed to this article. The information provided herein is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein)



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