Queries on taxation and service tax liabilities, addressed by Vivek Sharma & Rajat Bose of Ernst & Young

We import and sell medical devices from our group company. We imported our first consignment from our group company six months back. The customs authorities insisted us on paying an extra duty deposit of 1% and also issued us a notice for valuation proceedings to determine whether the import was done at arm?s length. The proceeding is now over and our original import price has been accepted by the customs. We have filed a refund claim of extra duty deposit, however, a local consultant informed us that a refund of the extra duty deposit will not be granted to us because we have recovered the same from our customers. Please let us know if this is correct.

Imports made by an Indian entity from its related party are subject to scrutiny by a Special Valuation Branch (SVB) of customs to verify the arm?s length nature of the transaction. For this purpose, the SVB authorities issue a questionnaire which is to be replied within 30 days. Pending the investigation, the importer is required to deposit 1% extra duty. Once the valuation is finalised by the SVB, the extra duty deposit has to be refunded to the importer after adjustment of any additions, and subsequently, the bill of entry is finalised.

The refund of customs duty is governed by Section 27 of the Customs Act, 1962 (Act) which provides that any amount refundable to a person for any duty paid/borne by him shall be refunded to the said person only if the incidence of the said amount is not passed by him to the customers (Doctrine of Unjust Enrichment). However, there have been several judgments at various appellate levels, wherein, it has been held that provisions of unjust enrichment are not attracted in the case of finalisation of provisional assessment.

In the case of Oriental Exports Vs Commissioner of Customs, New Delhi reported in 2006 (200) E.L.T. A138 (S.C.), the Supreme Court upholding the judgment of Delhi Tribunal, held that the Bar of unjust enrichment is not applicable to refund and recoveries consequent to finalisation of provisional assessment under Section 18 of the Customs Act.

Given the above, it can be construed that the refund of extra duty deposit should not be subjected to unjust enrichment in normal circumstances and the refund should be granted to you.

Cenvat credit of input services

We undertake construction of flats and have been paying service tax under the category of construction of complex service on the abated value till last month. However, we understand the service tax regime has undergone a complete overhaul and there is no specific category now. We understand that now we can also claim the Cenvat credit even after availing of the abatement. Please clarify.

Effective July 1, the service tax regime has undergone significant changes. Service tax is now payable on all services except those specified in negative list or specifically exempt. Further, abatements have been provided under the new regime for specific services, subject to certain conditions. In this regard, certain abatements have been provided on specific services subject to fulfillment of conditions. For construction of complex, buildings, civil structure or part thereof meant for sale to a buyer an abatement of 25% is given, provided that Cenvat credit of inputs has not been taken under the provisions of Cenvat Credit Rules, 2004.

However, there is no restriction on availment of Cenvat credit so far as input services or capital goods are concerned. Given the above, in our view, you can avail of Cenvat credit of input services and capital goods and utilise the same against output Service tax liability even if you have paid service tax on abated value.

Place of provision of service

We provide services to our clients abroad in identifying potential markets/clients in India. For this, we receive our consideration in foreign exchange and accordingly our services qualify as export under the export of service rules. We understand that Export of service rules have now been replaced by Place of provision of service rules, 2012 and the condition for enjoyment and use of services has been re-introduced under Rule 13 of the said rules. Please confirm our understanding.

Place of provision of service rules, 2012 (PoS) has been introduced to determine the place where a service is provided. As per PoS, various rules have been introduced for determining the place where the service is provided based on the location of service recipient, performance of service, location of immovable property services relating to events and location of service provider for specified services.

Rule 13 of the said rules gives the government the power to notify any description of service or circumstances in which the place of provision shall be the place of effective use and enjoyment of a service. It would be pertinent to note that no such services have been notified as yet and accordingly as of now condition for effective use and enjoyment of service is not applicable on provision of any service.

The replies do not constitute professional advice. Neither Ernst & Young nor FE is liable for any action taken on the basis of these replies. Readers may mail their queries to fesmes@gmail.com