Amarchand & Mangaldas & Suresh A. Shroff & Company Service Tax: Advance Rulings, Appeals, Interest, Penalties and Prosecutions Mekhla Anand Amarchand & Mangaldas & Suresh A. Shroff & Company July 2, 2011 mekhla.anand@amarchand.com

Agenda Advance Rulings (‘AAR’) Appellate Remedies in Service Tax Interest Penalties Prosecution

Advance Rulings

Advance Rulings : Scope Definition Determination of a question of law or fact by an authority with respect to the liability to pay service tax in relation to a service proposed to be provided by the applicant Objectives Trade facilitation measure Determination of tax liability prior to commencing business Avoid long drawn litigation Relatively expeditious

Advance Rulings : Scope Questions entertained Classification Valuation Applicability of exemption notifications Admissibility of cenvat credit Liability to pay service tax Questions not entertained Those based on a hypothetical situation Where services are ongoing Taxability of a particular service Pertaining to circulars Those already pending before the authority Those which have already been answered by the authority

Advance Rulings : Who Can Apply? Permitted Applicants Joint Venture Non resident setting up in collaboration with another Non residents/resident Resident setting up in collaboration with non resident Any joint venture in India Wholly owned Indian subsidiary of a foreign holding company Any other category notified by the Government Public Sector Companies

Advance Rulings: Procedure Application Application to be filed in prescribed form, with valid verifications along with filing fees Details of questions proposed and applicant’s analysis to be provided Applicant permitted to withdraw application within 30 days Examination Application forwarded to the jurisdictional Commissioner Commissioner to provide relevant records Admission AAR may admit or reject the application after examination Applicant to be given a reasonable opportunity to be heard before rejection Acceptance/rejection to be communicated

Advance Rulings: Procedure Hearing AAR can call for additional information, where necessary Additional facts/ questions can be admitted at the AAR’s discretion AAR to hear applicant as well as the Commissioner Default in appearance could result in an ex-parte order Ruling AAR to pronounce a ruling within 90 days of receipt of a defect free application Order to be in writing Copy to be provided to the applicant/ Commissioner at the earliest Appeal Writ petition filed before the High Court Special Leave Petition (SLP) filed before the Supreme Court Writ / SLP can be filed either by the applicant or the tax authorities

Advance Rulings: Key Considerations Binding nature Binding on both the applicant and the tax authorities no change in the factual matrix or in the law limited to the transaction in respect of which the ruling was obtained Advance rulings are not binding on other tax payers; however rulings do have a persuasive value Other Considerations No limitation on the duration of validity of the advance ruling Can be declared void ab initio in cases of fraud or misrepresentation of facts No obligation on the service provider to undertake the activity proposed

Appellate Remedies in Service Tax

Appeal to Commissioner (Appeals) Who can appeal Any person aggrieved by any decision or order passed by an authority subordinate to the Commissioner may appeal to Commissioner (Appeals) Commissioner may also examine records of a proceeding and request his subordinate to file an appeal Where adjudicating authority makes an application against an order of the Commissioner Central Excise, such application to also be treated as an appeal Limitation period three months from the date of receipt of the order Extendable by another 3 months at discretion of the Commissioner (Appeals)

Appeal to Commissioner (Appeals) Appeal to be filed in prescribed form. Separate application for condoning delay/waiver of pre - deposit Personal Hearing and determination of appeal Proper speaking order to be passed taking into account grounds of appeal Commissioner (Appeals) to pass any order as he thinks fit, including an order enhancing assessment and remand Enhancement order not to be passed without reasonable opportunity being given to assessees

Appeal to Tribunal Who can appeal Any person aggrieved by order of Commissioner or Commissioner (Appeals) Committees consisting of two Chief Commissioners or two Commissioners of Central Excise may direct Commissioner/Commissioner (Appeals) to file appeal to Tribunal if it objects to any order passed by Commissioner Limitation period Appeal to be filed within three months of receipt of the order Tribunal may condone delay in filing of appeal

Appeal to Tribunal Filing Appeals to be filed in prescribed form Separate application for waiver of pre- deposit and condoning delay To be filed in quadruplicate Fees Rs.1,000/- where demand is upto Rs.5 lakhs Rs.5,000/- where demand is more than Rs.5 lakhs and upto Rs.50 lakhs Rs.10,000/- where demand is more than Rs.50 lakhs Department not required to pay any fees Objections The other party can file cross-objection within 45 days of notice in ST -6

Appeal to High Court/Supreme Court On questions relating to classification or valuation, appeal lies to the Supreme Court from the order of the Tribunal On all other issues, appeal lies to the High Court from the order of the Tribunal, if the case involves substantial question of law Appeal to the High Court within 180 days from the date of receipt of the order of the Tribunal An appeal lies to the Supreme Court from the order of the High Court

Interest

Interest Section 75 of the Finance Act 1994 (“Act”) Interest on delayed payment of tax Section 73 B of the Act Doctrine of unjust enrichment Interest recoverable Rule 14 of the CENVAT Credit Rules, 2004 (“Rules”) Where any CENVAT credit has been taken or utilised wrongly or refunded erroneously

Interest Rate of Interest Simple interest between 10% and 24% per annum as may be prescribed Interest rate revised to 18% per annum vide Budget Announcements Reduced rate of 15% per annum for small service providers i.e. those below threshold of INR 60 lakhs for the last preceding year or period covered in notice Mandatory levy Interest under service tax is a mandatory levy

Calculation of interest Payable for the period of default Suppose service tax of INR 10,000/- was due Due date of payment was 05/04/2011 Payment made on 02/07/2011 Period of default (P) = 88 days Rate of interest(I) = 18% Interest would be calculated as follows Interest=P*I*Service Tax due 365 i.e. 88*18%*10,000 = INR 434

Interest: Key Considerations Calculating period of default Payment made by cheques In case of a stay obtained from appellate authority retrospective operation of law Tax is paid prior to issuance of a show cause notice Can interest be demanded in absence of tax liability No Paid in excess Doctrine of unjust enrichment not applicable Adjustment of excess tax

Penalties

Penalties Payable over and above service tax and interest Not mandatory Where reasonable cause is proved, mitigation available under Section 80 of the Act Provisions revised vide Finance Act, 2011 Monetary limits revised Mitigation provisions in case records maintained

Penalty Provisions Provision Particulars Penalty 70 Delay in filing returns INR 20,000/- 76 Failure to pay service tax INR 100 per day during which failure continues or 1% tax per month whichever is higher Capped at 50% of the value of service tax Penalty order required to be a speaking order

Penalty Provisions Provision Particulars Penalty 77 Penalty for specified contraventions: Failure to get registered INR 10,000/- or INR 200/per day whichever is higher Failure to furnish information, produce documents or appear before Central Excise Officer Failure to keep, maintain and retain books of accounts INR 10,000/- Failure to pay tax electronically Issuance of invoices with incorrect or insufficient details or non accounting thereof

Penalty Provisions Provision Particulars Penalty 78 Suppression of taxable value on account of Fraud Collusion Willful misstatement Suppression of facts Intention to evade tax Equal to the amount of service tax Mitigation available where true and complete information captured to 50% of the tax amount Where tax is paid within a period of one month along with interest and penalty: amount reduced to 25% of the tax amount For small service providers time period for payment of tax amount and penalty increased to 90 days Penalty under Section 76 and Section 78 mutually exclusive Waiver of penalty under Section 80 only where records maintained

Prosecution Provision Particulars 89 Provision or receipt of service without issuance of an invoice Availment and utilisation of CENVAT credit without actual receipt of inputs/input services Maintaining false books of accounts or failure to supply any information or false information Non payment of service tax collected for a period more than 6 months Punishment If amount > 50 Lakhs – Imprisonment upto 3 years Others – Imprisonment upto 1 year No power of arrest Prosecution can be launched only with the approval of the Chief Commissioner

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