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Service tax notice of Rs 325 cr
October, 23rd 2009

The service tax department in Mumbai, a wing of the Central Board of Excise and Customs (CBEC), has issued a show-cause notice to Tata Motors Ltd, relating to a potential service tax liability of Rs325 crore for five years between 2004-05 and 2008-09, according to two officials of the agency familiar with the development.

CBEC is the apex body that regulates and administers collection of indirect taxes.

We have issued the notice to Tata Motors for violation of service tax norms, one of the officials told Mint last week. He declined to give details on the alleged violation of service tax norms by the firm. Neither he nor his colleague, one of the officials involved in investigation of the case, was willing to be identified as they are not authorized to speak to the media.

In an email response to Mint queries, a Tata Motors spokesperson said on Thursday: The demand raised by the service tax authorities has been arrived at without considering the details available with the department. The company has already paid service tax that was due on regular basis for the aforementioned period and no material liability to pay additional service tax is expected to arise.

A show-cause notice is not an indictment, but only seeks an explanation from a company, typically within a month.

If Tata Motors decides to pay up, this will have an impact on the firms profitability as this liability is 63% of its first quarter net profit in the current fiscal.

But the company is unlikely to pay up, said a Tata Motors executive, who did not want to be identified. The company will definitely contest it.

This would mean that after replying to the notice, Tata Motors is set to appeal the claim before the commissioner of service tax in Mumbai.

Service tax is an indirect tax imposed on certain services such as broadcasting, banking, advertising and intellectual property services, among others. It was introduced in July 1994 and covers all service providers in India, except those in Jammu and Kashmir. The current rate of service tax is 10.2% of the cost of services rendered. The tax is paid by the service provider barring those cases where the service provider is not based in India.

Supriya Oberoi Jain, a senior manager at audit and consulting firm KPMG who specializes in indirect taxes, said: Normally, a show-cause notice is issued when the department already has some information on the company. She was making a general statement without any specific reference to the Tata Motors case.

Explaining the process, Jain said any kind of proceeding in India is initiated through a notice. After the notice is served, the assessee (the company that pays tax) has to explain its stand. The department then issues an order on the basis of the reply filed by the assessee. If the assessee agrees with the order, it pays up. The other option is to appeal against the order before the commissioner. Typically, the entire process takes at least six months.

At times, its a minor issue and the assessee pays up as it does not want to spend heavily on legal expenses. But if the issue is very big and the assessee genuinely believes that the claim is not right, it challenges the departments stance, Jain said.

In this case, Tata Motors seems to be challenging the claim, which, the company feels, is not justified.

In the past, several other firms have come under the service tax scanner. A March service tax audit report on Jet Airways (India) Ltd, the countrys second largest carrier by passengers flown, said the airline owes around Rs260 crore, including interest, to the department for the five years between 2003-04 and 2007-08.

The anti-evasion wing of the service tax department in June had issued a show-cause notice to state-owned National Aviation Co. of India Ltd, which runs Air India, asking for an explanation about the non-payment of around Rs100 crore service tax on the special flights it operates for the Haj pilgrimage.

Indias second largest private sector lender by assets, HDFC Bank Ltd, paid Rs131.40 crore, inclusive of interest, to the service tax department in July after the government agency found the bank did not follow certain provisions of service tax rules.

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