Certain infrastructural construction services provided by any person to Government, local authority and Governmental authorities are being exempted from service tax under entry 12 of Notification 25/2012-ST dated 20.06.2012. The said entry is reproduced as under;

“12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -

• a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

• a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

• a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

• canal, dam or other irrigation works;

• pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or

• a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act”

(Note: With effect from 01.04.2015, the entries (a), (c), (f) are omitted and by entry 12A exemption is restored with respect to these entries but only for contracts entered into prior to 01.04.2015)

The exemption under the above reproduced entry is applicable if the services are provided to Government or Local authority or Governmental authority. The term ‘Governmental authority’ for the purpose of this exemption is given under clause (s) of Part II (Definitions) of the Notification 25/2012-ST dated 20.06.2012. The same is reproduced as under;

“Governmental authority" means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution

In view of the above reproduced definition, the following conditions are required to be cumulatively satisfied in order to consider a particular authority as “governmental authority"—

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ØItshallbe a board, or an authority or any other body established by Government Øwith90% or more participation by way of equity or control by Government and Øsetupby an Act of the Parliament or a State Legislature

Øtocarryout any function entrusted to a municipality under article 243W of the Constitution.

Thus the above definition of ‘Governmental authority’ has restricted scope and does not include various bodies/authorities like government companies, boards, authorities that are established and owned by Government by means of a gazette notifications and are not separately setup by an Act of Parliament and State Legislature.

In view of this legal anomaly, the definition has been amended by Notification 2/2014-ST dated 30.01.2014 with a view to include within its ambit, the entities which are established by Government but are not necessarily setup by an Act of Parliament or State legislature. The amended definition is reproduced as under;

"governmental authority" means an authority or a board or any other body;

• set up by an Act of Parliament or a State Legislature; or (ii) established by Government,

with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution;

In the recent Finance Budget, 2016, it is proposed vide clause 156 to introduce a new section 101 in Finance Act, 1994 to refund service tax if any paid based on the previous restrictive definition of ‘Governmental authority’ for the canal or irrigation works undertaken prior to 30.01.2014; The TRU Circular F.No.334/8/2016-TRU dated 29/02/2016, which was issued to clarify the proposed budget changes, has made the following observation;

“K. Service Tax exemption to canal, dam or other irrigation works with retrospective effect:

30. Definition of Governmental authority was amended with effect from 30.01.2014 so as to exempt services provided by way of construction, erection, maintenance, or alteration etc. of canal, dam or other irrigation works provided to entities set up by Government but not necessarily by an Act of Parliament or a State Legislature. However, services provided prior to 30.01.2014 to such bodies remained taxable.The benefit of exemption is proposed to be extended to the said services provided during the period from the 1st July, 2012 to 29.01.2014.”

Thus the scope and intent of the above amendment in the definition of ‘Governmental authority’ is with a view to allow exemption benefit to those entities established by Government but not so by way of an Act of Parliament or State legislature.

Recently, the Patna High Court in the case of ShapoorjiPaloonji and Company Limited vs. CCE, 2016-TIOL-556-HC-Patna-ST had the occasion to interpret the scope and ambit of the above amended definition of ‘Governmental authority’.The facts of this case are that the petitioner company was appointed by IIT,

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Patna to construct their academic building. It was undisputed that IIT, Patna was setup by an Act of Parliament i.e. Indian Institute of Technologies Act, 1961. The petitioner company had initially collected service tax and paid. However, C&AG after conduct of their audit pointed that the petitioner company need not pay service tax for construction undertaken to the IIT. The petitioner applied for refund and the same was rejected.

The petitioner claimed refund on the interpretation that in order to come within the ambit of ‘Governmental authority’, it is sufficient that the same is set up by an Act of Parliament or State Legislature. The condition as to 90% or more participation by way of equity or control and to carry out any function entrusted to a municipality under 243W of the Constitution are not applicable for those entities that are set up by an Act of Parliament or State Legislature. The said conditions are applicable only for the second clause of the definition i.e. authority or body established by Central Government.

The Patna High Court heard the parties and came to the conclusion that no service tax is required to be paid by the petitioner for the reason that IIT falls within the ambit of ‘Governmental authority’. The relevant para is reproduced as under;

“The Governmental authority as defined in the notification dated 30th January, 2014, means an authority or board or any other body set up by an Act of Parliament or State Legislature. The provisions contained in sub-clause(i) and sub-clause(ii) of clause 2(s) are independent dis-conjunctive provisions and the expression “90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution” is related to sub-clause (ii) of clause 2(s) alone. The clause (i) is followed by “;” and the word “or”. Therefore each of the sub-clauses is independent provision.” (para 11)

In view of the above observation of Patna High Court, Governmental authority would include any authority or body set up by an act of Parliament or State Legislature. It also includes any authority or body established by Government with 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution.

Based on the interpretation of Patna High Court, any authority or body established under an act of Parliament or State legislature would come within the ambit of ‘Governmental authority’. This would be so even if Government is not holding 90% or more equity or controlling interest and such institutions are not entrusted with functions covered under Article 243W.These include institutions like LIC, IRDA, SEBI, ICAI etc. Thus any construction services of the nature specified under entry 12 to these entities would be entitled to exemption;

Before parting, as discussed above, by taking into cognizance the reasons/purpose behind the amendment to the definition of ‘Governmental authority’ coupled with clarification given by TRU on the scope of the amendment, the Revenue is not open to such wide interpretation of the term ‘Governmental authority’ as upheld by Patna High Court. Nevertheless the view of Patna High Court has opened the Pandora’s Box with respect to service tax applicability on the infrastructural construction works undertaken.

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

“Only two things are certain in life: Death and taxes- Benjamin Franklin".

We all agree with the above quote. Death will certainly put end to so many issues but not tax issues! In this article, we shall understand the assessment proceedings pertaining to a deceased assessee with the help of judgment of Honourable High Court in the case of CIT vs. M Hemanathan.

The background of the caseis that the Department even though they had notice of death of the assessee, proceeded to initiate revision proceedings against the deceased assessee.

The issue before the Honourable High Court of Madras is whether the proceedings initiated against the deceased assessee are valid when the legal heir has participated in the proceedings?

Facts of the case:

Assessee filed the return of income and the return was processed under Section 143(1) of the Act. Later the assessee case was selected for scrutiny and notice under Section 143(2) issued. A refund order was passed after taking into account the information submitted by the assessee.

After two years of passing assessment order, the CIT issued a notice under Section 263. The show cause notice was addressed to the assessee. Three months before the issue of show cause notice the assessee has passed away.

The show cause notice returned with the endorsement "assessee deceased". This fact was informed by the ITO to the Commissioner. Thereafter department served the same show cause notice to the son of the deceased assessee through messenger. Son participated in the proceedings through authorised representative.

Pursuant to show cause notice the case was remitted back to the assessing officer for passing a fresh order. The assessing officer passed an order raising the demand for payment of tax.

Son (legal heir) preferred an appeal against the order passed under Section 263 to the Tribunal. The appeal is allowed by the Tribunal holding that the order U/S 263 against a deceased person is null. Department has filed an appeal against the order of the Tribunal before Honourable High Court.

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Department Contention:

• The Tribunal was wrong in setting aside the order under Section 263 as null as it was passed against a deceased person as the legal heir participated in proceedings;

• Though the notice was issued on the deceased person it was served on the legal heir and legal heir participated in the proceedings. Therefore, the provisions of section 292BB will apply;

• As per the provisions of section 159(2) legal representative will deemed to be an assessee.

High Court Verdict:-

• Any proceedings initiated against the deceased person is a nullity. Law permits the proceedings to continue after the death of the assessee provided they initiated when he was alive and not otherwise.

• The purpose of issue of notice is to make the person aware of the nature of the proceedings. Once the nature of proceedings is made known and understood by the assessee, he should not be allowed to take advantage of certain procedural defects. The provisions of section 292BB cannot be invoked where the very initiation of proceedings is against deceased person.

• Provisions of section 159(1) would apply to a case where a liability has already crystallized. In this case the very initiation of proceedings was done after the death of the assessee. Despite the known fact that the assessee had passed away the department chose to pursue very same notice and hence department can't take the advantage of Section 159(2)(b).

• As the notice issued against deceased person the provisions of section 159(3) are not applicable.

• The very initiation of the proceedings against the deceased person and the continuation of the same despite having noticed the factum of death of the assessee, cannot be approved.

Remarks:

As the notice was issued in the name of the deceased assessee the proceedings are null. There is distinction between a case where proceedings are initiated against person, who is alive, but continued after his death and a case where proceedings are initiated against a deceased person himself. Former case is valid as per the Act while later is null.

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Background:

With globalization, International Trade is growing at a rapid pace. There are several aspects which the parties to a transaction consider while transacting international trade. One of them being Income tax. Clarity with regard to the Income tax exposure in the Resident Country and the other Country is of paramount importance to the parties to survive and be competitive in today’s world. Countries of the world fully acknowledge the above fact and have therefore devised ways to ensure clarity with regard to taxing rights over a particular transaction. However, in certain circumstances it may be the case that the tax is levied twice on a particular stream of income which gives rise to “Double Taxation”. 

Read more: Draft Foreign Tax Credit (FTC) Rules

1. What is the objective of Equalization Levy?

Equalization levy is introduced to reduce the unfair advantage enjoyed by multinational digital enterprise over its Indian competitors and ensure fair market competition.

2. Is Equalization Levy an income tax?

No. Equalization levy is not tax on income. It is levied on payments. For the same reason, a new chapter vide Chapter VIII of the Finance Bill, 2016 has been introduced to provide for equalization levy.

3. From when would this Equalization levy come into effect?

Equalization levy shall be levied on consideration received or receivable for specified services provided on or after the commencement of Chapter VIII of Finance Bill, 2016.

4. What is the rate of Equalization Levy?

The levy shall be @ 6% on the amount of consideration for any specified service received or receivable.

5. Is Equalization levy applicable on import of goods?

Equalization levy will not be levied on goods to be imported. Orders placed and payments made on the internet will not attract equalization levy. The levy is only on specified services.

6. All e-commerce transactions are covered under this levy?

Levy is on specified services only. It will not be levied on services that are not specified even if such services are procured by making payments from India over the internet. For example, if Indian resident books hotel rooms abroad and payment is made on the internet, such hospitality services are not specified service for the purpose of levy.

7. Does Equalization Levy apply to specified services received from a Resident?

No. Equalization levy comes into play only when specified services are provided by a non-resident to a person resident in India carrying on business or profession or non-resident having a permanent establishment in India (referred to as assessee).

8. What are the specified services for the purpose of levy?

Specified services means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government.

9. Is equalization levy imposed on all specified transactions irrespective of amount?

No. If aggregate amount of consideration for specified services received or receivable in a previous year by a non-resident from assesse exceeds Rs. One Lakh, equalization levy will be imposed.

10. What is the due date for payment of Equalization Levy?

The Equalization Levy so deducted during any calendar month shall be paid by every assessee to the credit of Central Government by 7th day of next month.

11. Whether grossing up is allowed?

Any assessee who fails to deduct the levy be liable to pay the levy to the credit of Central Government. (No grossing up of amount)

12. Whether the payment chargeable to Equalization levy would include indirect taxes paid in India?

The Committee on Taxation of E-Commerce recommends that the equalization levy should be chargeable on the amount received by the beneficial owner excluding any indirect taxes or levies paid in India. Hence, there cannot be any equalization levy on indirect taxes.

13. Whetheron the same amount equalization levy and income tax can be charged?

Income of a non-resident from services that are covered by equalization levy and on which equalization levy is paid will be fully exempt from income tax.

14. What are the consequences if Equalization levy is not paid?

Any consideration on which equalization levy is deductible and if such levy has not been deducted or after deduction has not been paid on or before the due date specified U/S 139(1) such consideration will not be allowed as deduction.

15. Will Equalization Levy paid after due date u/s 139(1) of Income Tax Act,1961 shall be allowed as deduction in another year?

Where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid.

16. Can benefit under tax treaties be claimed with respect to Equalization levy?

No. Equalization levy is not charged on income. Hence it is not covered by Double Taxation Avoidance Agreements (DTAA). No tax credit under the tax treaties available to the beneficial owner in the country of its residence in respect of such levy.

17. Are provisions of Transfer Pricing and GAAR applicable to Equalization levy?

Since the levy is not under Income-tax Act, the provisions of transfer pricing and General Anti Avoidance Rules will not be applicable to it.

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.