Taxability of inter-state sales sans Form C

Queries on taxation and service tax liabilities, addressed by Amit Bhagat and Jayanta Kalita of Ernst & Young

We are a Haryana-based manufacturer and seller of leather products like bags, wallets, etc. In addition to VAT, an additional surcharge/cess of 5% of the tax is been levied on local sales made in Haryana. We also sell our products outside Haryana and charge central sales tax (CST) at the concessional rate of 2% against Form C. However, in some cases, we have not received Form C from the customers. Our consultant advised us that in such cases the CST rate would be the local VAT rate. Please let us know if we are liable to pay the surcharge on such inter-state sales as well.

As per the Central Sales Tax Act, 1956, any sales made by a dealer against Form C shall attract CST at the rate of 2% or at the rate applicable to the sale in the state under the VAT law of that state, whichever is lower. In case the dealer is not in a position to furnish Form C, the local VAT rate as applicable in that state would be the effective rate.

In this regard, the Haryana Value Added Tax, 2003 (HVAT Act), specifically provides that additional surcharge is leviable as tax leviable under any other provisions of the HVAT Act. Also, the Punjab & Haryana High Court in the case of Sidwal Refrigeration Ind. (P) Ltd, held that wherever there is a provision for payment of a surcharge in addition to the tax, the applicable CST rate would be the rate as increased by such surcharge.

Accordingly, the applicable rate of tax for the purpose of payment of CST would be the local VAT rate and the additional surcharge.

Tax on services outside the taxable territory

Our firm provides services like architectural designs, interior decoration and end-to-end packers and movers. We recently got an opportunity to provide architectural services to one of the Indian companies for setting up their offices in Europe. Please advise whether we need to pay service tax on such activities under the new service tax law or whether such services would qualify as exports.

From July 1, 2012 the Export Rules have been rescinded. For determining whether the services provided outside the taxable territory we need to refer to the Place of Provision of Service Rules, 2012 (PoS Rules). The PoS Rules determine the place where a service is provided.

Rule 5 of the PoS Rules provides that in case of services directly related to an immovable property, the place of provision would be the location of the immovable property. However, Rule 8 specifies that in cases where both the service provider and service recipient are located in India, the place of provision of the service would be the location of the service recipient. Further, where the place of provision of a service is determinable by more than one rule, the latter would apply.

In the present case, Rule 8 would apply. Since both the service provider and service recipient are located in India, the place of provision of the service would be the location of the service recipient. In the present case, since the service recipient is located in India, the place of provision of service would be in India even though immovable property (in relation to which such service is provided) is situated outside India. Accordingly, the firm shall be liable to charge service tax for the services provided.

Service tax on packaging activities

Our company provides packaging services to various manufacturers. We have been charging service tax under the category of ?packaging activity services? to all our customers. Recently, one of the customers (a fertiliser manufacturing company) informed us that we are not liable to charge service tax since the packaging activity amounts to manufacture. Please advise if the position recommended by our customer is correct.

The activity of packaging service attracted service tax under the said category prior to the introduction of Negative List. However, an exception was carved out to the service category that in case the packaging activity amounts to manufacture, no service tax shall be applicable.

The pertinent question in the instant case is whether the activity of packaging fertilisers would amount to manufacture. In the event, packaging amounts to manufacture, the service shall not attract service tax.

In this regard, the Supreme Court in the case of Andhra Fertiliser Ltd has held that the Excise Act seeks to impose duty on manufactured goods. In the case of fertilisers, activity of packing would be integral to the manufacture of goods since it lends marketability to the products. It was held that it would be wrong to contend that the manufacture of fertilisers would be complete without loading into bags (packaging activity) that make it marketable.

Accordingly, in the present case since the packaging activity would amount to manufacture, it shall not attract service tax under the taxable category of ?packaging activity services?.

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 sme@expressindia.com