Here are some queries on taxation and service tax liabilities, addressed by Ernst & Young. Readers may mail their queries to fesmes@gmail.com
We are engaged in galvanising processes for various products manufactured by other companies. Post-galvanising, the products are returned to the companies and thereafter, used by them for further manufacture. Since galvanisation does not amount to manufacture, we pay service tax on our invoices @10.3% under ?business auxiliary services? after availing cenvat credit of duty and service tax paid on inputs and input services. However, the service tax department has informed us that the services rendered by us are exempt from service tax and accordingly, we cannot avail of cenvat credit of inputs and input services used for providing such services. We have therefore, been directed by the department to reverse such cenvat credit.
As per Notification No. 8/2005-service tax, any process (not amounting to manufacture) undertaken for or on behalf of a client is exempt from service tax subject to the condition that the product is used in further manufacture by the client. However, the exemption granted under the notification is not compulsory and is not binding on the service provider. Therefore, the service provider can elect to charge and deposit service tax on such services. To this end, the service provider can avail of cenvat credit with respect to inputs and input services used for providing such services and utilise the same against its service tax liability.
We manufacture air-conditioners, which we sell through our distributors. We receive our payments through cheques. At times if the cheques bounce our bank charges us a penalty (including service tax). We obtain a reimbursement of the amount charged to us by the bank from our distributors and simultaneously avail cenvat credit of the service tax charged by our bank. Does this amount to incorrect availment of credit?
We understand that the banks charge a penalty on account of the bouncing of the cheques. You obtain a reimbursement of the total charges of the bank from your distributors, but do not charge or deposit service tax on such reimbursements. Service tax should not be applicable on the penalty charges, which you reimburse from the distributors since the same is not towards any taxable service rendered by you. However, since the charges by the bank are not used by you towards any taxable service rendered by you, it is unlikely that you would be eligible to avail cenvat credit of the service tax charged by the bank on the penalty for cheque bouncing.
We manufacture copper wires. Our products are usually transferred to our depots from where the goods are sold to our distributors. We intend to give our distributors an annual discount based on the value of turnover achieved. Since the value of discount would not be known during sale, we shall not be in a position to ascertain the value of discount and the value for charging excise duty. Kindly suggest a methodology.
In this case, we understand that the goods are not sold at the time they are removed from the factory and are transferred to the depots from where they are sold. The value on which excise duty would be charged is the ?normal transaction value?. In any transaction a discount is allowed on the declared price of goods if actually passed on to the buyer of goods.
Where the assessee claims that the discount of any description for transaction is not readily known but would be known only subsequently e.g., year-end discount, the assessment for such transactions may be made on a provisional basis. However, the assessee has to disclose the intention of allowing such discounts to the excise department and make a request for provisional assessment. At the time of final assessment, the assessee is required to ascertain and establish the value of discount given and that actually passed on to the buyers.
?The replies do not constitute professional advice. Neither Ernst & Young nor FE is liable for any action taken on the basis of these replies