Queries on taxation and service tax, addressed by Saloni Roy & Jayanta Kalita, of Ernst & Young

We are an export-oriented unit (EOU). Going forward, we plan to sell some goods to a group entity located in India, which, in turn would sell those goods to entities outside India. However, the goods will be physically exported from our unit directly. We wish to understand if such sales to our group entity will still be counted towards our Net Foreign Exchange obligation?

Para 6.10 of the Foreign Trade Policy read with Para 6.18 of the Handbook of Procedures stipulate that exports by an export-oriented unit through other exporters shall also be counted towards the computation of its Net Foreign Exchange (NFE) obligation. The NFE with regard to such exports would be computed on the basis of the price at which the goods are supplied by the EOU to the other exporter. Other conditions with respect to such exports are also stipulated in the Handbook of Procedures.

Service tax on transfer charges

We are a engaged in construction and sale of residential apartments. At times, during the construction of flats, the allottee of a flat requests for the transfer of the flat to another person. In such cases, in lieu of changing name/transferring ownership we recover ?transfer charges? from the original allottee. We have received a show- cause notice from the authorities, levying a service tax on such transfer charges under the category of ?real estate agent service?. We wish to understand if we are liable to pay service tax on such charges?

Section 65(105) (v) of the Finance Act, 1994 defines ?real estate agent service? to mean ?any service provided or to be provided to any person, by a real estate agent in relation to real estate.? Further, the term ?real estate agent? has been defined to mean a person who is engaged in rendering any service in relation to sale, purchase, leasing or renting, of real estate and includes a real estate consultant.

In the instant case, a view can be adopted that there is no service being provided in relation to sale or purchase of real estate merely by virtue of change in name in the records of the developer. It can be argued that transfer charges are in the nature of reimbursement for expenses incurred by a developer to substitute the allottee and transfer the property in the name of the new allottee. It is essentially not in the nature of service but an obligation arising out of the terms of allotment letter.

There are also many judicial pronouncements which have held that transfer charges are not in connection with provision of services by a real estate agent in relation to buying and selling and should not be liable to service tax. However, in a recent adjudication of a stay application for waiver of pre-deposit, the tribunal has held that prima facie, transfer charges should attract service tax under real estate agent?s services. Accordingly, it is recommended that this issue be reviewed to determine the applicability of service tax.

Remote storage of inputs

We manufacture industrial machinery at our plant in Gujarat. We import goods for use in the manufacturing process. Since we do not have space in our factory, we propose to send the goods to a warehouse, which is not registered under the excise law. The goods would then be dispatched to our factory as per the requirements. We wish to understand if this is allowed, can we avail of cenvat credit on such inputs?

Rule 8 of the Cenvat Credit Rules, 2004 (the Credit Rules) stipulates that the jurisdictional deputy/assistant commissioner may, in exceptional circumstances having regard to the nature of the goods or shortage of space in the premises of the manufacturer, allow the storage of inputs outside the factory premises. Accordingly, you could send the inputs outside your factory for storage. However, this would be allowed only with the prior permission of the officer having jurisdiction over your factory.

As regards cenvat credit, typically, where inputs have been removed from the factory, cenvat credit is required to be reversed. However, where inputs have been removed from the factory under Rule 8 after permission of the jurisdictional deputy/assistant commissioner, this cenvat credit need not be reversed, subject to such conditions and limitations as the officer may specify.

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