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    This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts. 

    In the case of conflict between the provisions of the Income-tax Act, 1961 (”the Act ”) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 

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    The aim of the series of articles is to give a bird's eye view on the impact of service tax on the various transactions pertaining to the real estate industry. The complications involved in the real estate industry are myriad and often confusing for the trade as regards to the impact of service tax. The confusion prevalent is further accelerated by the stands and interpretation taken by the authorities who are always pro-revenue. Further, the other reason for the confusion is rapid amendments taking place in law pertaining to real estate industry which also makes the lives of the professionals involved in guiding the trade and industry miserable.

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    Compounding of Offences Under Income Tax:

     

    According to provisions of Section 279(2) any offence under the Chapter XXII (Offences and Prosecutions) may, either before or after institution of proceedings is compounded by the Principal Chief Commissioner or Chief Commissioner or a Principal Director General1 or Director General.

     

    Compounding of offences is not a matter of right. However, offences may be compounded by the competent authority on his satisfaction of the eligibility conditions prescribed in these guidelines keeping in view factors such as conduct of the person; nature and magnitude of the offence and facts and circumstances of each case. 

    Competent Authority for Compounding:

    The CCIT/DGIT( CCIT includes Principal CCIT and DGIT includes Principal DGIT) having jurisdiction over the person, seeking compounding of an offence, is the competent authority for compounding of all Category 'A' and Category 'B' offences. 

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    The definition of 'input service' is always a mystery to the trade and business and the concept of 'works contract' is even more disturbing. This article attempts to deal with the two promising issues when they get in touch with each other, that is to say whether the credit of service tax paid towards the 'works contract' services shall be eligible for Cenvat Credit as input service. 

    Before examining the issue, it is very important for the reader to note the changes that have taken place in the definition of 'input service' as laid down vide Rule 2(l) of Cenvat Credit Rules, 2004. Earlier to 2011, the definition of 'input service' is very wide enough to cover all the services in its ambit to claim as Cenvat Credit for the service provider. This definition has led to a huge revenue loss to theexchequer and hence there was an amendment to the definition of 'input service' post 2011 which has restricted the scope of such definition, which shall be discussed in detail in the later part of the article. 

    The amended definition which was effective from 01.04.2011 has made the definition of 'input service' into 3 parts. 

    1st Part     – 100% nexus with the provision of the output services provided by service provider; 

    2nd Part     – Irrespective of the Nexus theory, the credit stand eligible; 

    3rd Part    – Specifically Excluded from the ambit of the definition.

    As laid above, the first part of the definition deals with eligibility of the credit of services, which are having nexus with the provision of output services. Hence, all services which are having intimate nexus shall be eligible vide this part of the definition except specifically excluded (vide third part of the definition). The second limb of the definition of the said input service deals with eligibility of the credit of services irrespective whether they having nexus with the provision of output services. To be more lucid, once the services procured falls in the second limb, they are eligible for availment of credit irrespective of having nexus with the output services. 

    The third limb of the definition of the said input service deals with exclusion category. If the services procured fit into the third limb of the definition, the credit on such services cannot be availed unless the service provider fits into the eligibility criterion laid down by such limb. To be precise, the credit of the services shall be allowed only if the service procured and service provided falls in the same category. One of the services that appear in the 3rd limb is 'works contract services' which this article aims to deal with it. 

    Let us put down the exact lines spelt out by the definition when it comes to exclusion of the credit on works contract services, so that we have a clear picture of the same. The relevant part is extracted as under:

    (l) "input service" means any service – but excludes 

    (a) construction or execution of works contract of a building or a civil structure or a part thereof; or 

    (b)laying of foundation or making ofstructures for support of capital goods, except for the provision of one or more of the specified services 

    From the above part of the definition, it is evident that the credit of service tax paid on input services pertaining to the works contract services and construction services are excluded and shall be allowed only if they are used for providing the specified services. That is to say the service provider engaged in construction or execution of works contract of a building or a civil structure or part thereof or laying of foundation or making of structures for the support of capital goods can only avail credit of service tax paid on any such services received from either sub-contractors or any other person. 

    Now with the above background of the law, the question for consideration is whether the said exclusion shall be applicable only for 'original works' in the works contract services or 'all works contract services'?

    Let us take an example of a service provider who is engaged in provision of chartered accountant services. The chartered accountant wishes to renovate/repair his office for provision of effective services and thus hires a contractor for renovating/carrying the repairs works of his office. The contract was awarded with material and labour to the account of the contractor and thus making the contract as 'works contract' services as per Section 65B (54) of the Finance Act, 1994. The contractor has provided renovation/repair services and charged service tax in his invoice. The chartered accountant has paid the same to the contractor and was in doubt whether the said service tax paid is eligible for the availment of cenvat credit and utilisation thereof against the liability towards chartered accountant services? 

    On the detailed examination of the definition of the 'input service', the second limb allows the credit of service tax pertaining to the renovation of the premises of the service provider. The relevant part of the second limb states as 'and includes services used in relation to modernisation, renovation or repairs of a 

    factory, premises of provider of output service or an office relating to such factory or premises'. As stated above, once the service falls under the second limb, there is no question of looking for nexus and stands eligible. However, the third limb specifically excludes the credit of the 'works contract' services except the service provider is a 'works contracts' service provider, which is not the fact in the instant case. Hence, there is a contradiction between the 2nd limb and 3rd limb. When 2nd limb specifically includes repair/renovation services, the 3rd limb allows such credit to only works contract service providers. 

    It can be argued that the 2nd limb only covers such services where material is not involved that is to say if the contract is purely for labour, then the credit of such services is eligible vide 2nd limb and if the contract is for both material and labour, then it does not fit into 2nd limb and gets excluded by virtue of 3rd limb since the later uses the phrase 'works contract' which means material and labour in the same contract. In my view, the above argument is not logical since the credit of services procured shall be decided to be eligible or not depending upon the definition of the 'input service' and not based on the method of agreement/contract entered in the context.

    Hence, I am of the view that when the 2nd limb specifically allows the credit of service tax paid on services pertaining to the modernisation, renovation or repairs of a premises of provider of output service provider or an office relating to such premises, there cannot be an exclusion carved out in 3rd limb. If the intention of the legislature is to exclude such services then there shall not be in any mention of the same in the 2nd limb. Hence, the credit of such services stands eligible for the chartered accountant. 

    Then that leads us to a question, what are the services that are covered under 3rd limb of the definition to stand out of the definition of the 'input services'. In my view, the 3rd limb covers services in the nature of 'original works' namely the new constructions or substantial constructions and not the petty works. Let us assume that Chartered Accountant instead of renovation/repairs to his office intends to construct a new office, in such a case whether the credit of service tax paid to the contractor is eligible? The answer is no, since the 3rd limb covers such instances and also the above reasoning is in alignment with the intention of the legislature because of the removal of phrase 'setting up' from the 2nd limb of the definition of 'input service' with effective from 01.04.2011. 

    To conclude, the 3rd limb covers contracts which are in the nature of the original works and not the petty works or other than original works which stands includible in the 2nd limb. It is very important to note that all credits of work contract services are not sprightly ineligible or eligible. It has to be carefully examined in the light of definition of 'input service' before availment and pre-utilisation.

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    Introduction: 

    Tax Deducted at Source (TDS) is one of the modes of recovery of income tax. Chapter XVII of the Income Tax Act, 1961 contains the provisions relating to deduction of tax at source from salaries, payment to contractors, interest etc… 

    The Finance Act, 2012 has made an amendment to the definition of the term “Royalty” with retrospective effect from 01-06-1976. The amendment was made by inserting Explanation 4, 5 and 6 to the section 9(1) (VI). 

    This change has an impact on the payments made for internet charges, mobiles bills, telephone charges etc. 

    Issue after the Amendment: 

    whether TDS has to be deducted from internet bills, mobile bills etc.. as payment for broadband services, mobile services would amount “Royalty” after the amendment made by the Finance Act, 2012 retrospectively?

    Analysis: 

    The relevant section that merits our consideration is Section 194J. Section 194J is attracted when the payment is made to a Resident. 

    The Relevant Portion of Provisions: 

    Section 194J: It provides that any person, not being an individual or Hindu undivided family, who is responsible for paying to a resident any sum by way of 

    • “ Fees for professional services” or 
    • “Fees for technical services” or 
    • ……………………………. Or 
    • “Royalty” or 
    • …………… 

    shall , at the time of credit of such sum to the credit of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode , whichever is earlier, deduct an amount equal to 10% of such sum as income – tax on income comprised therein;

    Explanation: For the purpose of this section- 

    “Professional Services” means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or the technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purpose of section 44AA or of this section; 

    The services of Internet facility, mobile phone services are not professional services as per the above definition. 

    “Fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of section 9(1). 

    Explanation 2 to Section 9(1)(vii) – For the purpose of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under head “Salaries”.) 

    In CIT v Bharati Cellular Ltd (2008) 175 Taxmann 573 (Delhi) it was held that the word 'technical' is preceded by word 'managerial' and is succeeded by the word 'consultancy'. Since the expression 'technical services' is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. This would mean that the word 'technical' would take colour from the words 'managerial' and 'consultancy' between which it is sandwiched. On going through the dictionary meaning the words 'managerial' and 'consultancy' involve a human element and both managerial and consultancy services are provided by humans. Consequently, applying the rule of noscitur a sociis, the word 'technical' have to construe as involving a human element. It would not include any service provided by the machines. 

    The services of Internet facility, mobile phone services are not provided by human beings, this part of the section is also not applicable. 

    Now, we turn our attention to the term “Royalty” 

    The explanation to Section 194J provides that Royalty shall have the same meaning as in Explanation 2 to Section 9(1)(vi). 

    The Explanation 2 to Section 9(1)(vi) reads as under: 

    For the purpose of this clause, “Royalty” means consideration (including any lump sum consideration but 

    excluding any consideration which would be the income of the recipient chargeable under the head

    “Capital gains”) for— 

    (i)     The transfer of all or any rights (including the granting of a license) in respect of a patent, invention,  model, design, secret formula or process or trade mark or similar property; 

    (ii) The imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; 

    (iii) The use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

    (iv)         The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; 

    (iva)     The use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB; 

    (v)          The transfer of all or any rights (including the granting of a license) in respect of any copyright, 

    literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or 

    (vi)         The rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), 

    (iva) and(v). 

    This definition of “Royalty” has been amended by inserting Explanation 4,5 and 6 to section 9(1)(vi) by Finance Act, 2012 with retrospective effect from June 1st , 1976. 

    Explanation 4 clarifies that royalty includes transfer of all or any right for use (or right to use) a computer software (including granting of a licence) irrespective of medium through which such right is transferred. 

    Explanation 5 clarifies that royalty includes any consideration in respect of any right, property or information, whether or not--- 

    1. The possession or control of such right, property or information is with the payer;
    2. Such right, property or information is used directly by the payer; 
    3. The location of such right, property or information is in India. 

    Explanation 6 clarifies that the expression “ Process” includes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber, or by any other similar technology, whether or not such process is secret. 

    For the purpose of section 194J, “Royalty” means royalty as given in explanation 2 to section 9(1)(vi). When explanation 4,5 and 6 inserted in section 9(1)(vi) by the Finance Act 2012, a reference of these explanations was not simultaneously incorporated in section 194J. 

    The amount payments made for telephone bills, internet bills etc does not constitute payment towards 

    Royalty as per above Explanation 2 to section 9(1)(vi) for following reasons:

    • There is no transfer of rights or grant of license in respect of any patent, invention, model, design, secret formula, process or trademark or similar property. 

    The telecom companies or internet service providers do not impart any information concerning the working of or use of a patent, invention, model, design, secret formula, process or trademark or similar property.

    • There is no payment for the use of any patent, invention, model, design, secret formula, process or trademark or similar property. 
    • The telecom companies or internet service providers do not impart any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. 
    • The payment is not for use or right to use any industrial, commercial or scientific equipment. 
    • The payment is not for transfer of all or any rights including grant of license in respect of any copyright, literary, artistic or scientific work.
    • The payment is not for rendering of any services in connection with the activities referred to above. 

    It is relevant to note that 'right' is referred to in Explanation 2(i), (iva) and (v). In the instant case, there is no question of applicability of (i) and (v). Clause (iva) deals with industrial, commercial or scientific equipment. A telephone apparatus is a mobile instrument or other items at best can be instruments or appliances and not industrial/commercial/ scientific equipment 

    The Supreme Court in the case of BSNL Vs. UOI (2006) 145 STC 91, at Para 78 has held that providing access or telephone connection does not put the subscriber in possession of the electromagnetic waves any more than a toll collector puts a road or bridge into the possession of the toll payer by lifting the toll gate. Of course, the toll payer will use the road or bridge in one sense. But the distinction with the sale of goods is that the user would be of the thing or goods delivered. The delivery may not be simultaneous with the transfer of right to use. But the goods must be in existence and deliverable when the right is sought to be transferred. 

    The Supreme Court also held that the nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale. 

    It is a settled position of law that a particular provision refers to a term and the said term is referred to in another provision, only that other provision can be read. Nothing further can be read into the definition. In the instant case, Section 194J provides that Royalty shall have the same meaning as in Explanation 2 to Section 9(1)(vi). Therefore, nothing else can be read and since the applicability of Explanation 2 to Section 9(1)(vi) has been ruled out in respect of payments towards telephone bills, mobile phone bills and internet bills, Section 194J has no application. 

    Conclusion: 

    In our view, payments towards telephone bills, mobile bills and internet services, such payments cannot be considered as payment by way of Royalty and hence Section 194J in the context of Royalty has no application. 

    As such the provisions of section194J are not applicable to the payment made towards Internet, Mobile Phone Service etc.

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