Service Tax on service portion in Works Contract (effective from 1st October, 2014)

Service portion in the execution of a work contract is subjected to provisions of partial Reverse Charge Mechanism in case such service has been provided by any individual, HUF or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate located in taxable territory. As per existing rules in such cases 50% of service tax is payable both by service provider

and service recipient.

The valuation of service portion in Works Contract is governed by Rule 2A of Service Tax (Determination of Value) Rules,2006 which provides two options for the same.

OPTION I: Value of service portion in execution of work contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in execution of said works contract.

OPTION II: There were three categories. The categories and there valuation of service portion is tabulated as under:-

Sl No.	Categories	Valuation principle
1	Original works	40% of the total amount
2	Works contract entered for maintenance or repair or	70% of the total amount
3	Other work contracts including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling installation of electrical fittings of an immovable property 70% of the total amount charged	60% of the total amount charged for works contract

The change that has been brought by Union Budget, 2014-15 is amendment of Rule 2A of Service Tax (Determination of Value) Rules, 2006 wherein they have merged the categories 2 and 3 above into asingle category with percentage of service portion as 70%.

This change will come into effect from 1st October, 2014 and same has been notified vide Notification No. 11/2014-ST dated 11th July, 2014. It has been explained in the TRU, MoF, GoI letter No D.O.F No. 334/15/2014-TRU dated 10th July, 2014 that this rationalisation by way of merger of categories has been made to avoid disputes of classification between these two categories.

It is pertinent to mention here that the service provider and recipient would continue to pay 50% each of total service tax payable.

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Inter Corporate Investment in India

Company not to be made inter corporate Investment through not more than two layers of investment companies. 

Limits for the Investment, Guarantee and Loan

The Company shall make 60% of Paid-up Capital +Free Reserve + Security Premium or 100% of free reserve +Security Premium (Whichever is more).But the Company may give loan, guarantee or provide any security acquisition beyond the limit with the prior approval of Share holders in General Meeting. 

It is mandatory to take prior approval From Financial institutions, Banks from which Company takes loan and made any defaults against repayment of loan amount or interest.

The Company shall maintain a Register for recording these transactions

Exemption of the provision 

1. A Company acquires any Company which incorporated outside India. Such Company has Investment subsidiary beyond two layers as per the law of the host country.

2. A subsidiary Company from having any investment subsidiary for the purpose of meeting of the requirement under any law for the time being in force

Non applicability for certain Companies

1. Banking Company, Insurance Company, Housing Finance Company etc.

2. Any Company whose main business is acquisition of shares or any other securities

Penalty for Company

If the Company contravenes the provision, the Company shall be penalized with fine which shall not be less than Rs.25000/- but which may extend to Rs.5 lacs

Penalty for Officers

Every officer of the Company who is default shall be punishable with imprisonment for a term which may extended to two years and fine which shall not be less than Rs.25000/- but which may extended to Rs.1 lacs.

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Procedure for issue of Rights shares

Procedure for issue of Rights shares

(i) Check whether the rights issue results in increase of authorized capital.,

(ii) If so call a board meeting to approve the notice of General meeting to pass necessary special resolutions at the general meeting to amend Memorandum/Articles of Association

(iii) Convene the general Meeting and obtain shareholders’ approval through special Resolution.

(iv) The offer should be made by notice, specifying the number of shares offered and  limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined.

This notice shall be despatched through Registered post or speed post or through electronic

mode to all the existing shareholders at least three days before the opening of the issue.

(v) Check the copy of form SH 7, MGT14 filed with ROC.

(vi) The shares declined by the existing shareholder can be disposed off by the company in

manner which is not disadvantageous to the shareholders and the company.

(vii) Once the allotment is made, the company shall within 30 days of allotment, file with the

Registrar a return of allotment in Form PAS.3, along with the fee as specified in Companies

(Registration of Offices and Fees) Rules, 2014.

(viii) Deliver the share certificates of allotted shares within a period of 2 months from the date of allotment.

(ix) Intimate the details of allotment of shares to the Depository immediately on allotment of such shares

(x) In case of listed companies, the conditions prescribed under Chapter IV of SEBI (ICDR)

Regulations 2009.

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Reduction of Share Capital ~ Detail Procedure

(The provisions relating to reduction of capital under Companies Act, 2013 is not yet notified, the provisions of Companies Act, 1956, are dealt under ‘Reduction of Capital’)

1. Ensure that its articles of association contain a provision authorizing it to reduce its share

capital. If there is no such provision then the articles have to be first altered in accordance with the provisions of  Section 31 of the Companies Act, 1956.

2. Convene and hold a Board meeting to –

(i) approve the scheme of capital reduction by a resolution;

(ii) fix time, date and venue for holding a general meeting of the company for passing a special resolution for reduction of share capital subject to confirmation by Court* as per provisions of Section 100 of the Act and for altering the capital clause in the memorandum of association of the company, as a consequence of reduction in the share capital of the company; 
(iii) Approve notice, agenda and explanatory statement to be annexed to the notice of the

general meeting as per Section 173(2) of the Act; and

(iv) Authorize the company secretary or some other competent officer to issue notice of the

general meeting as approved by the Board.

3. Soon after the conclusion of the Board meeting, send to the stock exchanges, where the securities of the company are listed, particulars of the proposed reduction in the share capital of the company.

4. Issue notice of the general meeting to all members, directors and auditors of the company. Also send three copies of the notice of the general meeting to the stock exchanges where the securities of the company are listed.

5. Hold the general meeting and have the special resolution(s) passed.

6. Forward a copy of the proceedings of the general meeting to the concerned stock exchanges as per the Listing Agreement.

7. File e-form 23 along with a certified true copy of the special resolution(s), copy of

explanatory statement under Section 173 and copy of altered Memorandum of Association and Articles of Association with the ROC within thirty days of the passing of the resolutions along with the prescribed filing fee for its registration under Section 192 of the Act.

8. Apply to Court for confirmation of the capital reduction by way of a petition in Form No.18 of the Companies (Court) Rules, 1959 [Refer Rule 11 of the said Rules].

9. The petition must be accompanied by an application by summons to the judge in chambers for directions as to the advertisement of the petition, the notices to be served and the proceedings to be taken.

10. The petition must be verified by an affidavit in Form No. 3 of the said Rules [Refer Rule 21 of the Companies (Court) Rules].

11. The petition should be accompanied by the following documents:

(a) A certified true copy of the memorandum and articles of association of the company.

(b) A certified true copy of the notice of the general meeting together with the explanatory

statement annexed to the notice, at which the special resolution had been passed.

(c) A certified true copy of the special resolution authorizing the reduction of capital.

(d) A certified true copy of the latest audited balance sheet and profit and loss account of the

company together with all the schedules and other papers attached/annexed thereto.

(e) A certified true copy of the minutes of proceedings at the general meeting at which the

special resolution was passed.

12. Publish an advertisement of the petition not less than fourteen days before the date fixed

for hearing in one issue of the Official Gazette of the State or the Union Territory concerned and in one issue each of a daily newspaper in English language and a daily newspaper in the

regional language circulating in the concerned State or Union Territory if the Judge so directs on receiving the petition.

13. The directions, if any, given by the Judge are to be adhered to with regard to:

(a) The proceeding to be taken for setting the list of creditors entitled to object including the

dispensing with the observance of the provisions of Section 101(2) of the Companies Act, 1956 as regards any class or classes of creditors;

(b) Fixing the date with reference to which the list of creditors entitled to object including the dispensing with the observance of the provisions of Section 101(2) of the Companies Act, 1956 as regards any class or classes of creditors;

(c) Fixing the date with reference to which the list of such creditors is to be made out;

(d) The publication of notice; and

(e) Generally fixing the time for and giving directions as to all other necessary or proper steps in the matter.

14. A list of creditors in Form No. 21 of the Companies (Court) Rules, 1959, made out by an

officer of the company competent to make the same should be filed by the company within the time allowed by the Judge. The list should contain the particulars as enumerated in Rule 49 of the Companies (Court) Rules, 1959. Copies of such list shall be kept at the registered office of the company and at the office of the advocate for the company, and any person desirous of inspecting the same, may, at any time, during the ordinary business hours, inspect and take extracts from the same on payment of the sum of one rupee.

15. The list of creditors should be verified by an affidavit made by an officer of the company

competent to make the same. The affidavit should be in Form No. 22 with such variations as

circumstances of the case may require [Rule 50 of the Companies (Court) Rules, 1959].

16. Within 7 days after the filing of the list of creditors or such further time as the Judge may

allow, the company should send to each creditor a notice of presentation of the petition and the said list. The notice should contain the particulars as are enumerated in Rule 52 of the

Companies (Court) Rules, 1959.

17. According to Rule 53, notice of the presentation of the petition and of the list of creditors in Rule 49 should within 7 days after the filing of the said list or such further time as Judge may allow, be advertised by the company in the manner prescribed by the Judge. The notice should be in Form No. 24 of the Rules.

18. The company should also, as soon as may be, file an affidavit proving the dispatch and the publication of the notices referred to in Rules 52 and 53, in Form No. 25 of the Rules.

19. Within the time fixed by the Judge, the company should also, according to Rule 55, file a

statement signed and verified by the advocate of the company stating the result of the notices mentioned in the Rules 52 and 53.

20. The advocate of the company has to prepare the result of settlement of the list of creditors in the form of certificate which is to be signed by the Judge. Such certificate should contain the parts as enumerated in Rule 58.

21. After the expiry of not less than 14 days from the filing of the certificate mentioned above, petition will be set down for hearing. Notice of the hearing of the petition has to be advertised in Form No. 29 of the Rules, in such time and in such newspapers as the Judge may direct.

22. At the hearing of the petition the Judge may give such directions as he may deem proper

with reference to securing in the manner mentioned in Section 101(2) (c) of the Act, the debts or claims of any creditors who do not consent to the proposed reduction, and the further hearing of the petition may be adjourned to enable the company to comply with such

directions.

23. Before confirming reduction of capital, the Court will satisfy itself that the interest of the

creditors and different classes of shareholders, if any, are not affected adversely by the said

reduction of capital.

Where the Court makes an order confirming reduction, it may also make an order, for any

special reason, directing the company to add to its name as the last words thereof, the words

“and reduced” during such period commencing on or at any time after the date of its order and also require the company to publish the reasons for the reduction of such other information in regard thereto, as it thinks proper. If the Judge makes an order directing the company to publish the reasons for the reduction or such other information in regard thereto, the company should comply with the same as per Rule 64.

24. The order of the Court confirming the reduction of capital and approving the minutes shall be in Form No. 30 of the Rules with such authorisation as may be necessary.

25. File e-form 21 prescribed in the Companies (Central Government’s) General Rules and

Forms (Amendment) Rules, 2006 with the Registrar.

26. Deliver to the Registrar, a certified copy of the order of the Court confirming the reduction of the share capital of the company and of the minute approved by the Court* and produce before him, if so required, the original copy of the order. The Registrar will register the copy of the order and the minute and will certify the same under his hand. On the registration of the order and the minute, the resolution for reducing share capital as confirmed by the order, shall take effect. The minutes when registered shall be deemed to be substituted for the corresponding part of the memorandum of the company, and shall be valid and alterable as if it had been originally contained therein.

27. Publish the notice of registration in such manner as the Court directs.

28. Make necessary alteration in the records of the company, on all stationery items, share

certificates, blank forms of share certificates lying in the office of the company and all copies of the memorandum and articles of association of the company lying in the office of the company..

29. Take all other steps in accordance with the scheme of reduction of share capital of the

company as approved by the Court, e.g. to pay-up share capital which is in excess of the wants of the company.

30. The company must send to the concerned stock exchanges in case of listed company three copies of all the notices, circulars etc. issued and/or published in newspapers by the company in connection with the reduction of the share capital of the company as per the Listing Agreements signed with the stock exchanges.

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Point of Taxation Rules amendment w.e.f.1st October, 2014

As per existing Rule 7 of the Point of Taxation Rules, 2011, the point of taxation is respect of persons required to pay tax as recipients of service under reverse charge mechanism is the date on which payment is made. However, the first proviso of said Rule mandates that where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this Rule did not exist, i.e., we need to fall back on Rule 3 of the Point of Taxation Rules which states that point of taxation shall be time when invoice for service provided or agreed to be provided is issued (completion of service where invoice is not issued within 30/45 days as the case may be) or date of payment whichever is earlier.

Thus, effectively as per said Rule, Point Of Taxation of services under Reverse Charge Mechanism is the date of payment of invoice or in case invoice is not paid within six months, the point of taxation would be the date of invoice.

Union Budget 2014-15 has amended the first proviso of Rule 7 to provide that point of taxation in respect of reverse charge will be the payment date or the first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier.

From the first blush, it appears that the only amendment made is curtailing of earlier time limit of six months for payment of invoice to three months. However, there is a positive side of amendment as well. Under the existing Rule, in case the payment is not made within six months the point of taxation is shifted to date of invoice and thus such person apart from payment of service tax was also obligated to pay interest thereon. However, under the new provision though the time limit has been curtailed to three months, but if this limit is breached the point of taxation would be the first day that occurs immediately after period of three months and POT is not shifted to date of invoice. This would avoid payment of interest for the intermittent period.

It is important to note here that this amendment will only apply to invoices issued after 1stOctober, 2014.

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How to file Online Income Tax Rectification application under section 154 ?

This article explains Procedure for Filing Online Request for Rectification of Mistake U/s. 154 of the Income Tax, Prerequisites for Filing Such Application, Common mistakes while filing Rectification, Important Notes before e-Filing Rectification, Tips on filling Income Tax Return to avoid mistakes.

Introduction – Rectification application maybe filed u/s 154 of the Income Tax Act by the taxpayer in case of any mistake apparent from the record.

An Income Tax authority may:

a) Amend any order passed by it under the provision of this Act

b) Amend any intimation or deemed intimation under sub-section (1) of Section 143.

Subject to the other provisions of this section, the authority concerned,

a) May make an amendment under sub-section (1) of its own motion,

b) Shall make such amendment for rectifying any such mistake which has been brought to its notice by the assessee.

Pre-Requisites to file online Rectification Request U/s. 154

1. The Income Tax Return for the Assessment Year should have been processed in CPC, Bangalore.

2. An Intimation under Section 143(1) OR an order under Section 154 passed by CPC, Bangalore for the e-Filed Income Tax return should be available with the taxpayer.

3. For Electronic returns filed and processed at CPC, only online rectifications will be considered.

4. If the refund arising out of return processed at CPC is adjusted against the demand of other

Assessment Years and then the assessee is challenging the demand itself, in that case

i)   Rectification application has to be filed for the demand year, if the demand was raised by CPC then online application has to be filed

ii)   for the demand raised by the Field Assessing Officer, the application has to be filed before him.

1. No rectification has to be filed for giving credit to taxes paid after raising the demand.

2. To file your Rectification, you should be a registered user in e-Filing application

Below listed are the steps to file Rectification for Rectification:

Step 1 - LOGIN to e-Filing application and GO TO –> My Account –> Rectification request.

Step 2 - Select the Assessment Year for which Rectification is to be e-Filed, enter Latest Communication Reference Number (as mentioned in the CPC Order), and Latest CPC Order Date (as mentioned in the CPC Order).

Step 3 – Click ‘Submit’.

Step 4 – Select the ‘Rectification Request type’

–> ‘Taxpayer Correcting Data for Tax Credit mismatch only’ − On selecting this option, three check boxes, TCS, TDS, IT, are displayed. You may select the check-box for which data needs to be corrected. You can add a maximum of 10 entries for each of the selections. No upload of an Income Tax Return is required.

–> ‘Taxpayer is correcting the Data in Rectification’ − select the reason for seeking rectification, Schedules being changed, Donation and Capital gain details (if applicable), upload XML and Digital Signature Certificate (DSC), if available and applicable. You can select a maximum of 4 reasons

–> ‘No further Data Correction required. Reprocess the case’ − On selecting this option, three check-boxes, Tax Credit mismatch, Gender mismatch, Tax/ Interest mismatch are displayed. You may select the check-box for which re-processing is required. No upload of an Income Tax Return is required.

Step 5 – Click the ‘Submit’ button.

Step 6 – On successful submission, an Acknowledgment number is generated and sent for processing to CPC, Bangalore.

Post processing, either the rectification order under Section 154 will be issued

Common Errors in Rectification

a. Important Notes before e-Filing Rectification Request

1. You must file using the latest CPC Order for the selected Assessment Year. For eg: If an order has been passed by CPC on 27th September, 2013 and another order has been passed on 15th December, 2013, the assessee can e-File ONLY using the latest i.e. 15th December, 2013 order.

2. You can file another Rectification for the same Assessment Year ONLY if the previous Rectification request is processed.

3. The CPC order details can be used ONLY once to file a Rectification. Any subsequent Rectification should be filed using new/latest CPC order details. However, the same CPC Order details can be re-used if the e-Filed Rectification has been withdrawn by the assessee ( Note: Time for withdrawal is 7 days from date of e-Filing the Rectification)

4. The rectification request can be withdrawn within 7 days if submitted by mistake or the request needs to be amended. LOGIN and GO TO ‘My Account’ –> ‘Rectification status’ to withdraw the Rectification.

b. Tips to the user on filling the Income Tax Return

The complete Income Tax Return should be e-Filed and NOT just the schedules/ fields that need change/correction. However, there should NOT be any revision in Income or new claims of deduction/ exemption made in the Rectification request, as this would lead to rejection or delay in processing by CPC. Please note that this facility is only provided by Income Tax Department for correcting mistakes. In case you wish to make changes in Income or make new claims, a Revised Income Tax Return should be filed as per the Income Tax Act, 1961.

c. Common mistakes while filing Rectification

1. It is noticed that Communication Reference Number mentioned in the CPC Order (u/s 143(1) or 154) is entered wrongly. It must be mentioned exactly as it appears on the CPC order.

2. Right Assessment Year should be selected.

3. The complete Income Tax Return should be e-Filed and NOT just the schedules/ fields that need change/correction.

4. In case of change in ‘Income’, a rectification should NOT be filed. A revised Income Tax Return should be filed in this case, of course, subject to the time limit as per the Income Tax Act, 1961.

5. In case of change in ‘Bank Account details’ OR ‘Address Details’, a Rectification should NOT be filed. You can LOGIN and GO TO My Account –> Refund Re-issue request and raise a request for change in the Bank Account/Address details (in case of refund failure).

Note: The Bank Account details and Address details as in the original Income Tax Return (processed) will be considered for any refund/demand notice, and not the bank account/address details mentioned in the Rectified Income Tax Return.

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Why Cenvat not utilized in Reverse Charge ?

The CENVAT are available as credit to a service provider when :

a)  Any input or capital goods received in the premises of the provider or output service on or after the 10th day of September’ 2004

b)  Any input service received by the provider of output services on or after the 10th day of September’ 2004

The Cenvat Credit so available can be used for the following purpose to a service provider:

• An amount equal to Cenvat Credit taken on inputs if such inputs are removed as such after being partially processed

• An amount equal to the Cenvat Credit taken on Capital Goods if such capital goods are removed as such

• Service Tax on any ouput service

As per Rule 2(p) of Cenvat Credit Rule, 2004 defines output services as;

“output service” means any service provided by a provider of service located in the taxable territory but shall not include a service;-

1. Specfied in section 66D of the Finance Act; or

2. Where the whole of service tax is liable to be paid by the receipt of service.

Accordingly, output service definition includes all services other than:

• Negative Services [specified in section 66D of the Finance Act]

The exclusin aims to disallow the credit against the Negative services on which no service tax is payble.

• Where the whole of service tax is liable to be paid by the receipt of service

This exclusion provides that a service provider on whose services the recipient is liable to pay the entire tax, such services would not qualify as output services from the perspective of service provider. Servies where whole of the service tax is to be paid by the service recipient are as follows.

a) Services of insurance agent

b) Services of Goods Transport Agency (GTA) of goods transport

c) Sponsorship service

d) Services of Arbitral Tribunal

e) Legal Services of Advocate or Advocate Firms

f) Services of director to company (entry added w.e.f. 7-8-2012)

g) Support Services by Government or Local Authority excludingrenting of immovable property and services specified in clauses (i), (ii) and (iii) of Section 66D(a) of Finance Act, 1994 (These cover postal, port, airport and railway services)

h) Renting or hiring of motor vehicle designed to carry passengers to any person who is not in the similar line of business

i) Supply of Manpower for any purpose or security service (The words ‘or security service’ were added w.e.f. 7-8-2012

j) Service portion in execution of Works Contract

k) Services received from non-taxable territory (Import of Service)

Thus, in all above cases, the services would not be considered as output services from the perspective of service provider. Accordingly, service provider in above cases would not be able to CENVAT credit of input and input services used in provision of such services.

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