Exemption Notifications in Service Tax and football In the game of football the moves are of fire fighting nature. Nobody can imagine which situation may crop up and when, hence counter move for every move is just impossible in advance. Likewise, in Service Tax the interpretation of exemption notification from point of view of Excise department is just impossible. And suppose if the interpretation is about the section under which the said exemption is given is absolute or conditional then for today service provider have only one option left that to err on safer side and pays the Service Tax blindly. For this the classic example is Notification No. 8/2005 – ST dated 1/3/2005. The service provider of taxable service of ‘Business auxiliary service’ covering ‘production or process on behalf of client’ is once again in dilemma. Without availing the exemption given under the said Notification (8/2005) if somebody pays the Service Tax then whether such act of revenue addition is an offence? 1. As far as Section 5A of CEA, 1944 is concern the explanation given

under said section makes it clear that if the exemption given under this section indicating that this is absolute then there is no option or choice than to avail the same.

2. But for Section 93 of Finance Act, 1994 we cannot say so because ny

notifications issued under this section is of conditional and optional and therefore service providers have always choice whether to avail it or not.

3. It means the Notification 8/2005 – ST is also of optional and conditional

and therefore if somebody without availing the same pay the service tax at appropriate rate then nobody can object that the service tax paid by the service provider is wrong.

If above mentioned 1 to 3 are correct then according to CENVAT Credit Rules, 2004 if any manufacturer avails the CENVAT Credit of Service tax

charges by his job worker cannot be construed as wrongful availment of Credit. It is so simple that if any service provider (job worker) without availing the exemption (like 8/2005) charged the service tax to the parent manufacturer and if that parent manufacturer avails the credit of it, then there is no revenue loss as such. When the interpretation of any exemption is so easy why the excise department tries to make it complicated? For the interested one see the case study given below. a) ‘A’ is a job worker engaged in job work of powder coating on the goods

supplied by ‘B’ who is a manufacturer. b) For ‘A’ principal raw material is powder and chemicals (hereafter

referred to as inputs for short) which cost substantially. c) ‘A‘ procuring said inputs on payment of duty and you can take credit of

duty paid on the inputs. d) ‘A’ is not manufacturing any excisable goods and hence not registered

under rule No 9 of CER 2002. e) Activities of ‘A’ fit into the definition of job work as given in the

relevant job work notifications like 214/86 –CE dt 25/03/1986. f) ‘B’ who take benefit of Cenvat credit facility under Cenvat Credit Rule

2004 avail Cenvat credit on his inputs or partially processed inputs and send these inputs to ‘A’ for powder coating, it is mandatory for him to send such goods to ‘A’ under Rule 4(5) (a) of the Cenvat Credit Rule 2004. Excise department has not prescribed any format for delivery challan under said rule 4(5) (a). However, the manufacturer is expected to write it on this challan so that job worker knows that he is a manufacturer paying appropriate duty.

g) Since ‘A’ is a small organization, it is not possible for him to detect the kind of customers coming to him and he cannot definitely say whether the customer is a trader or a manufacturer or whether is paying duty or not or whether he is defaulter in the eyes of excise. There is cut throat competition in ‘A’s type of business i.e. powder coating.

h) Powder coating is an operation for a process, which can be used even for protecting surfaces of such goods, which do not attract excise duty. For e.g. old domestic furniture.

‘A’s value of taxable service exceeds Rs 4 lacs in a financial year therefore he cannot enjoy benefit of exemption notification No 6/2005 dt 1/3/2005 which is a conditional notification. Therefore he is obliged to take Service Tax Registration and pay service tax accordingly. Penalty Shoot Outs 1. Not only job workers like ‘A’ but even manufacturers and many Central

Excise Officers do not understand the difference between a process which amounts to manufacture and process which does not amount to manufacture and then the small job workers suffer.

2. Many manufacturers who take Cenvat credit on inputs / capital goods are

not aware that they can take credit of Service tax paid on any input service (Definition of input service is very clearly given in Rule No 2 of Cenvat Credit Rules 2004).

3. Explanation (1A) under Section 5A of the CEA 1944 stipulates that when

any exemption notification is conditional, the assessee has an option whether or not to take the benefit of it. He has no such option if the exemption is absolute. In Service Tax under Sec. 93 there is no explanation which means that there is no absolute and therefore service provider has always option if any Notification is issued under Sec. 93 of Finance Act, 1994. In fact if you see any Service Tax exemption notifications almost all of them are conditional.

4. Notification No 8/2005 is very much conditional notification issued

under the authority of S. 93 of FA 1994 and therefore there is nothing wrong or illegal if ‘A’ refuse to take benefit of it and prefer to pay service tax on taxable service provided by ‘A’. This notification makes use of the following words, ‘production or processing of goods for, or on behalf of the client’. It refers clause (v) of clause 19 of Section 65 of Finance Act. This clause forms part of the definition of ‘Business Auxiliary Service’. This definition has been amended several times and the new definition with effect from 10/09/2004 excludes any activity that amounts to manufacture. However, it includes any processing of goods.

5. This confusion is still not removed to distinguish between a process or production or a process amounting to manufacture and manufacture. In my opinion all convey same meaning. So it is better to err on safer side.

6. ‘A’s activity fits under ‘Business Auxiliary Service’ which is taxable.

However as rightly said powder coating is such a process which in some cases may not amount to manufacture at all like domestic furniture (if old domestic furniture is repaired and powder coated then powder coating activity can be input service of the output service called management, maintenance and repairs). If somebody is rendering this kind of service then he can take credit of service tax paid on powder coating treating it as input service.

7. Certainly non-payment of excise duty or service tax is an offence but I do

not understand as to why payment of excise duty or service tax should be treated an offence, when Government is benefited.

Goal Revenue Neutral Exercise: If ‘A’ pay service tax in all the cases ignoring exemption notification No 8/2005 ST then Government is benefited if the customer cannot avail Cenvat credit. If the customer is eligible for Cenvat credit then even if ‘A’ pay service tax, Government is not looser under law because the customer is going to pay extra excise duty or service tax on value addition. It is very difficult to say that the studied and knowledgeable excise officers fail to understand simplest logic. Ignoring this logic I believe that it will be difficult to establish for them that ‘A’ have committed any offence by payment of service tax. Now your chance!