Does service tax apply to payment in foreign exchange?

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: We provide Information Technology Software Services (ITSS) to group companies (that qualify as associated enterprises under the income tax law) located outside India. We receive payment for our services in convertible foreign exchange. Are we required to deposit service tax on such services?

As per the Service Tax Export Rules, ‘ITSS’ qualifies as ‘export of services’ if the service recipient is located outside India. The following additional conditions also require to be satisfied for services to qualify as export. The service is provided from India and used outside India, and payment for such service is received in convertible foreign exchange.

In the present case, all the above conditions would be satisfied and therefore, your services should qualify as export of service from India. Being an export of services, service tax should not apply.

In case of transactions between associated enterprises, service tax is payable on book adjustment and not upon collection (as is the usual case). At the time of book adjustment for the services provided to group companies, the condition of receipt of payment in foreign exchange may not have been met in your case and technically a liability to deposit service tax can arise. This appears to be an anomaly.

We manufacture auto components in our factories in Madhya Pradesh and Tamil Nadu and installed machinery in these factories a few years ago. We now plan to shift some of these machines to our new factory in Uttaranchal. We have been advised to pay cenvat credit availed in respect of the machines and remove the same under the cover of an excise invoice. Is this correct?

Since the machines are removed after use, the cenvat credit rules prescribes a formula for payment (that is, reversal) of cenvat credit availed. As per the rules, the cenvat credit availed on the machinery is to be reduced by 2.5% for each quarter of a year from the date of taking such credit. Hence, you are not required to reverse the entire cenvat credit taken initially but the reversal can be limited to the amount after the allowed deduction.

What is the scheme of advance rulings? Who can apply for the same?

Advance ruling means determination of specified questions of law by the Authority for Advance Ruling (AAR) on an application regarding liability to pay service tax in relation to a service proposed to be provided. A question in respect of an on going business is inadmissible under the advance ruling mechanism. The AAR shall not allow an application where the question raised is already pending in the applicant’s case before the authorities or at an appellate level the same as in a matter already decided by the tribunal or a court. An applicant for AAR purposes can include any of the following persons:

* A non-resident setting up a joint venture in India in collaboration with a non-resident or resident

* A resident setting up a joint venture in India with a non-resident

* A wholly-owned subsidiary Indian company of which the holding company is foreign

* A joint venture in India

* A resident, as the central government may specify.

Advance rulings, concerning service tax matters, can be sought in respect of:

* Classification of any service as a taxable service

* The valuation of taxable services for charging service tax

* The applicability of exemption notifications

* Admissibility of credit of service tax

* Liability to pay service tax.

An individual proposes to enter into an agreement with a contractor for civil construction of a residential property in Gurgaon. The residential property being constructed is for personal use. Will service tax be applicable on the construction of the property?

The following taxable service categories are relevant for determination of the service tax applicability on construction of a residential property:

* Construction of complex service (including construction of a new residential complex)

* Works contract service (including transfer of property in goods involved in execution of a contract for construction of a new ‘residential complex’)

The term ‘residential complex’ has been defined in the service-tax legislation as ‘any complex comprising of a building or buildings having more than twelve residential units, a common area’.

Since, in the present case, the residential complex constructed would be a single unit, the same would not qualify as a ‘residential complex’ as taxable either under ‘construction of complex service’ or ‘works contract service’. Hence, civil construction of a single residential property will not attract service tax.