The concept of service tax which was introduced in the year 1994 is still evolving. There are a lot of issues involved which need resolution. The service provided by the Custom House Agent (CHA) which was made a taxable service on June 15th, 1997 is also marred with many problems.
Custom House Agent Service – An Overview: –
The service of CHA is taxable under Section 65 (105) (h) of the Finance Act, 1994. The said provision reads as under:
“(h) to any person by a custom house agent in relation to the entry or departure of conveyances or the import & export of goods.”
Thus, the services undertaken by CHA which is in relation to the entry or departure of conveyances or the import and export of goods is a taxable service under the Finance Act, 1994.
Issues involved: –
In these CHA services, during the import or export of goods, apart from the service of CHA there are various other services which are involved like the port services, terminal handling service, cargo handling service, cleaning or fumigation of containers services etc. In most cases, it is the CHA who is dealing with the service providers providing these services on behalf of their customer. The CHA even hires the service providers providing these services for the customer. Thereafter, he charges the same from the customers. There are number of disputes arising due to the same. These are discussed below:-
1. Valuation of services: – The very first question is whether the services rendered by others will be includible in the taxable value of CHA. Whether he has to pay tax on the same?
2. Allowability of credit: – The service of the CHA and the service providers providing the cargo handling, cleaning, port and other port services are providing the service to the importer/exporter. In many cases, the service providers are raising the bill to the CHA which is not in the name of the customer. In such cases, whether the credit availed by the customer is admissible? In most of the cases the CHA reimburses the service providers and in turn collects the said charges from the customer. It is also a practice that the CHA when issues his own bill to the customer, he attaches the bills of the service providers with his bills but does not include the said amount billed to him by the service providers in his own bill. Also, the CHA may be sending the photocopy of the invoices of the service providers with his bill. The question of admissibility of cenvat credit can arise in such cases.
3. Refund of service tax to exporters: – The refund of services provided by CHA in relation to export of goods, is to be refunded to the exporters. If the CHA includes documentation charges, Terminal Handling charges and BL charges in his invoice and charges service tax on complete amount then the department says that these are not CHA agency Commission but the port charges. But since the CHA is not registered under the port services then refund is not admissible.
We will be discussing these provisions one by one.
The Board Circular F.No.B-43/1/97-TRU, dated 06.06.1997 had clarified that the service tax would be charged on the ‘service charges only’ and statutory levy and other reimbursable charges would not be included in the taxable value. It was also provided that in case there are lump sum payments towards the reimbursable as well as service charges, service tax would be charged on 15% of the gross value only.
Then in the year 2006, the Service Tax (Determination of Value) Rules were prescribed and the concept of ‘pure agent’ was brought. It was provided that expenditure or costs incurred by the service provider as pure agent alone will be eligible for exclusion from taxable value.
However, the disputes arose as to which services should be included for being available to the pure agent and which services should be excluded. There were different practices being followed by the CHAs regarding the documentation and records. To settle these disputes, now the Board has issued a new clarificatory Circular.
The Circular No. 1 19/13/2009-ST, dated 21.12.09 has been issued by the Board clarifying that exclusion of charges from the assessable value should be allowed to such charges from the taxable value of CHA services, where the prescribed conditions are fulfilled. These conditions are as under: –
a) The activity/service for which a charge is made should be in addition to provision of CHA service (as mentioned in paragraph 1);
b) There should be arrangement between the customer & the CHA which authorizes or allows the CHA to
(i) arrange for such activities/services for the customer; and
(ii) make payments to other service providers on his behalf;
c) The CHA does not use the activities !services for his own benefit or for the benefit of his other customers;
d) The CHA recovers the reimbursements on ‘actual’ basis i.e. without any mark-up or margin. In case of CHA includes any markup or profit margin on any service, then the entire charge (and not the mark-up alone) for that particular activity! service shall be included in the taxable value;
e) CHA should provide evidence to prove nexus between the other (than CHA) services provided and the reimbursable amounts. It is not necessary such evidence should bear the name or address of the customer. Any other evidence like BE No.!Container No.! BL No.! packing lists is acceptable for the establishment of such nexus. Similar would be the case for statutory levies, charges by carriers and custodians, insurance agencies and the like;
f) Each charge for separate activities!services is to be covered either by a separate invoice or by a separate entry in a common invoice (showing the charges against each entry separately) issued by the CHA to his customer. In the latter case, if certain entries do not satisfy the conditions mentioned herein, the charges against those entries alone should be added back to the taxable value;
g) Any other miscellaneous or out of pocket expenses charged by the CHA would be includable in the taxable value for the purposes of charging tax on CHA services.
These conditions will be applicable for services provided with effect from 19th April 2006, i.e. after the introduction of the valuation rules. It has been provided in the Circular that for the prior period, the taxable value should be determined in accordance with the prevailing instructions issued by the Board at that time i.e. before the introduction of valuation rules.
This is a welcome step from the Board in reducing the fog of issues surrounding the assessee. Now, the litigation regarding which charges are to be included in the assessable value of the CHA and which not will be reduced considerably. Some long awaited relief has been granted to the assessees. But the issue is not settled completely here. There are number of conditions attached to the same. The department can twist these conditions and disputes can arise on the same. For example, one condition is that there should be arrangement between assessee and CHA. It can be verbal or written. But the department may insist on written agreement which is practically absent.
Furthermore, if there is mark up which is normally the case then the CHA has to pay the service tax on whole amount and this will not be acceptable to importer or exporters. This will clearly reveal that he has charged the extra amount from them. Thus, it will be very difficult position for the CHA. However, in next points, we will discuss that the exporters or manufacturers will also be benefited if the CHA charges service tax on complete amount.
CENVAT CREDIT ON CHA BILLS:-
Another issue involved is regarding availability of cenvat credit. It is a general practice that the CHA is submitting his bill and is attaching the bills of other service providers providing the other services. The problem arising is that the bill issued by these service providers is not in the name of manufacturer but is in the name of the CHA. So, the manufacturer cannot take credit of service tax on such bills and if they take credit then the department raises objections regarding admissibility of the credit on the ground that the bill is not in manufacturer’s name. One solution to this problem suggested was that the CHA office should be registered as service tax distributor and pass on the credit to the manufacturer. But it was proved totally wrong. Firstly, the office of manufacturer can be registered as service tax distributor. Since the bill is not in the name of manufacturer but in the name of CHA and as such the problem exists. Also, if the CHA office is registered as service tax distributor then number of registrations will be issued to office of CHA as he will be dealing with many clients.
Secondly, the practice being followed by the CHA is that they do not attach the original bills with their own bill to the manufacturer but are attaching Xerox copies to the same. Again the problem arises for the manufacturer for taking cenvat credit as credit is not admissible on the Xerox copy of the invoice under the Rules. If the CHA pays the service tax and takes credit then will such credit be available to the manufacturer?
The solution is that the name and address of the manufacturer should appear in the invoice as the service recipient as per conditions stated in the Rule 4A of the Service Tax Rules, 1994 and the manufacturer should directly pay the service tax to the said service providers, then credit of service tax will be available to him. But it is not practical solution. The second and good solution is that the CHA takes the credit on these invoices and add some mark up and charge the same in his bill to the assessee. He will pay the service tax on complete amount. In this way, the CHA and the assessee both will be happy. The CHA will get the mark up and assessee will avail the credit.
REFUND OF SERVICE TAX TO EXPORTERS:-
Another issue is with regard to refund of service tax paid on services utilised for export of goods. The Government has granted refund of service tax paid on specified services utilised in relation to export of goods. The scheme is provided vide Notification No. 41/2007-ST, dated 06.10.07 as amended from time to time. This Notification has been superseded now by Notification No. 17/2009-ST, dated 07.07.2009. The specified services include the service provided by the CHA.
For the CHA services, the said Notification prescribes the following conditions: – “The exporter shall produce,-
(i) invoice issued by customs house agent for providing customs house agent services in relation to export goods exported by the exporter specifying:
a) number and date of shipping bill,
b) description of export goods,
c) number and date of the invoice issued by the exporter relating to export goods,
d) details of all the charges, whether or not reimbursable, collected by the customs house agent from the exporter in relation to export goods,
(ii) details of other taxable services provided by the said customs house agents for SroRiI iGgLanI IDceiRLI by the eYporL1E,wheth[111 r [St relataUlI LIZeY[Irt g[IoI I.”
However, it is not a normal practice of the CHAs to mention these details in their invoices and if any one detail is missing then the department is denying the grant of refund of service tax to the exporter. Also, the refund is not given on the Port charges like the B/L charges, Documentation charges, THC charges etc charged by the CHA on the ground that these services do not fall under the CHA services. But these fall under the port services. Now, since the Board has clarified that if the CHA adds some mark up then he can charge the same in his bill from the customer and pay the service tax on complete amount. If he does so then it will fall under CHA service only. Thus, the ground raised by the department will be rejected by this Circular and exporter will be able to get the refund of service tax paid on these amounts if charged in the invoice of CHA.
Comments & Conclusion:
With this circular, not only the dispute of valuation has been sorted out but it will solve the many problems faced by CHA and exporters/importers. The manufacturer will be able to take the cenvat credit after this circular and the exporters will be able to get the refund from the department. As such, this circular of the Board has done many things. A Hindi proverb can be very well said for this circular EK PANT DO KAAJ) i.e. one work is done and it has resulted in two solutions. But this circular has exceeded this proverb and has resulted in many solutions. This might have happened because it was issued for CHAs who also do many jobs for their clients.
CA Pradeep Jain
Sukhvinder Kaur, LLB (FYIC)
& Siddharth Rutiya