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  Tax queries answered by Dilip Lakhani, Senior Chartered Accountant

Service tax exemption on specified services
July, 23rd 2010

Here are some queries on taxation and foreign trade regulations, addressed by Ernst & Young. Readers may mail their queries to

Our company is engaged in the manufacture of excisable goods and pay excise duty on them. We also undertake mining of limestone, from our own mines, which is used as an input by us. Our manufacturing plant is located in Madhya Pradesh. On the movement of limestone from our mines to our manufacturing plant in MP, we deposit entry tax at the applicable rate. Currently, we are depositing entry tax on the market value of limestone, which predominantly depends on its quality. However, we have been advised to include all the costs, direct as well as indirect, incurred for the mining of the limestone for determining the value of goods on which entry tax needs to be paid. Kindly advise.

Valuations of goods under Entry tax statutes differ from state to state and currently, various litigations are pending in the apex court pertaining to the constitutionality of Entry tax. In the present instance, it is important to note that as per Rule 2 of the MP Entry Tax Rules, 1976, the value of goods on which tax is leviable would depend on the manner in which the goods have been acquired. In the case of purchased goods, the value of goods would be the purchase value and in case goods are otherwise obtained, the value of goods would be the market value .

In your case, as all the limestone is self-consumed, the taxable value of the goods would be the market value of the limestone, and hence your manner of valuation seems to be correct. However, please note that at a lower level, the department may resist this manner of valuation in favour of the cost computation method, if the same is higher.

Our company is engaged in the provision of logistics and warehousing solutions. To expand our operations, we are proposing to set up logistics and warehousing operations at the Kandla Port for importers and exporters. In this regard, we have been informed that a service tax exemption is available for certain categories of services provided at a port in the course of export. Kindly confirm our understanding. Also please advise, as to whether we can avail of the input credit for the inputs used for provisioning of such services.

As per government notification No. 17/2009 dated 7 July 2009, provides for an exemption to all service providers engaged in providing specific services to an exporter of goods, through a refund mechanism. It is important to note in this case that although the notification specifically provides exemption to the said specified services, the service provider (that is, you) has to deposit service tax, which subsequently would be available as a refund to the recipient. Services provided for storage and warehousing are also included in the list of specified services.

In our view, the exemption notification is actually a refund available to the exporter on fulfillment of prescribed conditions. The service provider pays service tax on the output services and hence, should be eligible to credit. However, given the use of the word exemption, this view is litiguous and may be challenged by the department, which may claim that Cenvat credit is ineligible in respect of inputs/ input services used for providing any output service which is said to be exempted under a notification (whether or not the service provider is actually required to pay service tax).

We are a BPO engaged in providing call centre services on which we deposit service tax. We have recently hired a catering firm for providing catering services to our employees. The said firm is depositing service tax and recovering the same from us. Kindly advise as to whether we can avail of Cenvat credit of the service tax paid for these catering services.

There are various conflicting judgments on the availability of Cenvat credit of the service tax paid on catering services. Earlier, various tribunal decisions had held that catering services within the premises of the manufacturer/service provider may be said to be indirectly related to the manufacture of goods/provision of output service, and consequently permitted to avail of Cenvat credit on the same.

However, based on the Supreme Court judgment in the case of Maruti Suzuki Ltd. Vs. CCE, Delhi, the scope of inputs/input services has been restricted to inputs/inputs services provided in relation to manufacture of goods/provision of output service integrally and not remotely. Based on this, Chennai Tribunal, in Sundaram Brake Linings judgment, has ruled that Cenvat credit will not be available for service tax paid on catering services as the same cannot be claimed to be an input service used in or in relation to manufacture of excisable goods. Accordingly, there is a strong chance that the department might deny Cenvat credit for service tax paid on input catering services.

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