Financial Daily from THE HINDU group of publications
Saturday, May 22, 2004
Continuing worries of consulting engineers
A circular issued towards the end of 2002 (No. 49/11/2002-ST) had clarified that the work of `erection and commissioning' is in the nature of services provided by a consulting engineer and, hence, taxable under service tax.
Thus, it widened the scope of consulting engineer's services, causing resentment and litigation.
In 2003, service tax was extended to `commissioning and installation' service, along with a host of other services, such as commercial vocational institute, technical testing, maintenance/repair services, business auxiliary services, Internet café, franchise services, and so on.
As if to queer the pitch, another circular (No. 59/8/2003) clarified that charges for `erection' of plant would not be covered under `commissioning and installation' services.
Enough confusion had been sparked off in the process among the fraternity of consulting engineers, so they came to consult the taxman to know what is what. More specifically, they wanted to know if charges for erection would be covered under service tax or not; also, whether commissioning or installation service would be covered under service tax under consulting engineer service effective from July 1997.
To explain, here is a new circular (No. 79/9/2004-ST) from the Central Board of Excise and Customs (CBEC), with the subject tag: "Application of Service Tax on activities of Erection and Commissioning".
It clarifies that charges for erection, installation and commissioning are not covered under the category of consulting engineer services. And that commissioning or installation service will be separately taxable under relevant entry and are not chargeable under consulting engineer services. "Accordingly, the clarification issued vide the Circular No. 49/11/2002-ST dated December 18, 2002, stands modified to this extent."
Thus, of the two limbs viz., erection and commissioning that were appended to consulting engineer's services by the 2002 circular, commissioning got included in 2003 under a separate head, bunched with installation, and the other limb, `erection' gets dropped now.
While consulting engineers need no longer worry about `erection', what could remain a question is if at a future date erection finds a place in a new service category.
As such, erection charges get out of the service tax net. However, there are other issues which are still open. There is a different circular of the CBEC issued in July 2002 that commissioning and installation charges should be included in the transaction value for calculation of excise duty. A case of double taxation arises, because the Department also collects service tax on commissioning and installation.
A related issue is that the provisions indicate that the service must be provided by a commissioning and installation agency.
Therefore, there is a view that the scope cannot be extended to `manufacturers' providing commissioning and installation services. If the CBEC were to treat the issue in favour of manufacturers, many would stand to benefit since it is common that contracts generally involve supply as well as commissioning and installation.
Collaboration agreements and consultancy
A number of companies which have entered into joint venture agreements, foreign collaboration agreements and licence agreements with foreign companies have also been issued show-cause notices by the Department.
According to the Department, these agreements result in technical assistance being provided by foreign companies to the Indian company or the joint venture company. Under service tax law, after August 16, 2002, if service is provided by a non-resident who does not have an office in India, the resident recipient of the service is liable to pay the service tax. The Department has taken a stand that even transfer or licence of technical knowhow attracts service tax.
This is a subject matter of dispute and litigation since knowhow in a media has been considered as goods by the Supereme Court in the Associated Cement Companies (128 ELT 21) case.
The knowhow is developed abroad by the foreign company and transferred or licensed to the Indian company and therefore, it cannot be said that service in the form of advice or consultancy or technical assistance in one or more disciplines of engineering is being rendered.
Whenever there is an import of technology into India, R&D cess at the rate of 5 per cent is payable under the Research & Development Cess Act, 1986.
Notification No.18/2002 of December 16, 2002, exempts taxable services provided by a consulting engineer to a client on transfer of technology from so much of service tax as equivalent to the amount of cess paid on the said transfer of technology.
(K. Vaitheeswaran is a Chennai-based advocate.)
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