Pre-Budget - Key Expectations from the Budget 2015-16
Direct-taxes
1. Tax Incentives to the manufacturing sector
The Modi Government seeks to boost Indian manufacturing with a "Make in India" campaign. So, one can expect tax incentives for the manufacturing sector in the forthcoming Union Budget. The tax incentives are more likely to be by way of investment-linked incentives rather than profit-linked incentives. Therefore, amendment may be made in the following sections of the Income-tax Act to boost manufacturing sector:
(a) Section 32AC (Investment Allowance): The Finance (No. 2) Act, 2014 amended section 32AC to allow investment allowance of 15% to manufacturing companies who have made investment in new plant and machinery in excess of Rs. 25 Crores during previous year. The threshold of Rs. 25 Crore is pretty high for micro and small enterprises. So, one can expect the threshold limit of investment to be lowered even further to say Rs. 5 crores so that micro and small enterprises would be able to avail the benefits under section 32AC.
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b)
Section 32(1)(iia) (Additional depreciation): On similar lines of section 32AC, Section 32(1)(iia) provides additional depreciation at the rate of 20% on new plant and machinery acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power. It is quite possible that to incentivize investments and simplify matters, additional depreciation of 20% may be scrapped and merged in investment allowance and total investment allowance of 35% may be allowed.
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2. Need clarity on taxability of capital gains in development agreements
In development agreement ('DA'), the land owner hands over the vacant possession of the land to the developers and also assigns the development rights to the developers. In return of giving up the land, the land owner receives an agreed share in the developed property. The taxability of transactions resulting from DA has been contentious issue since a long time. A few of those issues are mentioned as under:
(a) Year of taxability of capital gains, i.e., year of entering into DA or the year of allowing of actual possession or the year of receipt of developed property;
(b) Non claiming of deductions under section 54EC or section 54 in absence of receipt of money where taxability is fixed in the year of entering DA;
(c) Consideration for transfer of capital asset i.e. value of land transferred or value of developed property received.
The Budget, 2015 should come up with clear provisions regarding year of taxability of capital gains arising from transactions resulting from DA along with a proper computation mechanism. The difficulty faced in claiming exemption under sections 54 and 54F of the Act should also be kept in mind while making such provisions.
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3. Electronic Maintenance of books of account
Section 128 of the Companies Act, 2013 allows companies to keep books of account and other relevant papers in electronic format. In contrast, Section 2(12A) of the Act requires maintenance of books of account in written format or print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device.
Thus, in current scenario, when Government of India is taking holistic approach for e-Governance plans, it is recommended that the Income-tax Act should permit electronic maintenance of books of account in line with Companies Act, 2013.
4. Is investment in name of relatives valid for Sec. 54, 54B and 54F exemptions
Whether an assessee who makes investment in the name of his relative would be entitled to claim exemption under section 54, 54B and 54F or not is a big question that needs to be clarified in the forthcoming budget because judiciary differs on this question.
It is recommended that a proviso may be inserted suitably prohibiting the assessee from making a claim in respect of investments made in an altogether different name or in the name of distant relative. Insertion of this proviso should also clarify that exemption would not be denied merely because the name of spouse and/or son /unmarried daughter/blood relative is added in the new investments as a precautionary measure and not otherwise.
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5. We are all equal - All forms of discrimination should be abolished
Although the disallowance provisions under Sections 40(a)(ia) and 40(a)(i) are same, irrespective of tax residence, an exemption has been provided to cases involving payments to residents.
It has been provided under Section 40(a)(ia) that where payment has been made without deduction of tax, no disallowance can be made for Indian taxpayer if the resident recipient of such income takes into account such receipt while computing its taxable income, and files the income-tax return in respect of such income. However, for similar cases in case of payments to non-residents under Section 40(a)(i), there is no corresponding exemption.
This provision (i.e., Section 40(a)(i)) is clearly a case where a discrimination (although for the resident payer), is made for deductibility of payments in the hands of the resident, solely because of the fact that the recipient is a non-resident. The Hon'ble Finance Minister should consider the above aspect and make an amendment to remove this anomaly.
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6. Whether transfer of undertaking by way of exchange of shares is taxable as 'Slump Sale'?
'Slump sale' is defined so as to mean the transfer of one or more undertakings as a result of sale for a lump sum consideration without valuesbeing assigned to the individual assets and liabilities in such sales. The tax law provides for taxing the slump sale under Section 50B.
Whether exchange of assets against transfer of undertaking is taxable as slump sale under Section 50B has been a matter of dispute. The Bombay High Court in case of CIT v. Bharat Bijlee Ltd [2014] 46 taxmann.com 257 (Bom) heldthat the transaction of exchange is different in species from the transaction of 'slump sale', which is merely a sale against monetary consideration and, thus, the provisions of section 50B are not applicable to such transactions of 'exchange'.
The ensuing budget might provide clarity on the provisions of slump sale by taking into consideration various possible manner of transfer of undertakings.
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7. Whether interest is payable on interest on refund?
Section 244A of the Act starts with the expression 'Where refund of any amountbecomes due to the assessee under this Act, he shall, subject to the provisions of this section, be entitled to receive, in addition to the said amount, simple interest thereon……'
The words used by the Legislature in section 244A are 'any amount' which is much wider and broader than the 'tax amount'. Therefore, the words 'any amount' would not only include the tax amount within its ambit but also the interest element, which has accrued and is payable on the date of the refund.
But this position was reversed as a result of decision of the Hon'ble Apex Court (Larger Bench) in CIT v. Gujarat Fluoro Chemicals (Supra) which held that assessee is entitled only to statutory interest and therefore interest (second degree) on delayed interest (first degree and statutory) cannot be paid.
Therefore, it is recommended that the expression 'amount due' should be clarified by incorporating an
Explanation in Section 244A to the effect that amount due would include interest on refund if such interest is not paid along with the refund, provided delay in granting interest is not attributed to the assessee.
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8. Whether deferred receivable is an independent 'international transaction'?
The Central Government is all set to announce budget. Expectations are high. Amongst wishes of rate cuts, tax holidays and taxpayer's friendly budget, there is a desire to have clarity on some of the troubling areas of dispute. One such issue is imputation of interest on delay in realising receivables from associated enterprises.
The ITAT in case of
Goldstar Jewellery Ltd. v. Jt. CIT [2015] 53 taxmann.com 353 (Mumbai – ITAT)held that delay in realization of dues from the associated enterprise is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. This contentious issue would continue to haunt the taxpayers. Thus, it is expected that forthcoming budget would provide clarity on this issue.
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9. Applicability of TP provisions on shares issued to overseas AE
The term 'International Transaction' as defined in Section 92B of the Act has been an area of wide litigation under the transfer pricing provisions. One of the controversies which has evolved in the recent past is that whether issue of shares by an Indian company to its overseas subsidiary/associated enterprise would qualify as an international transaction or not?
Although the Bombay High Court in the case of
Vodafone India Services Private Limited v. Union of India [2014] 50 taxmann.com 300 (Bombay) which was held in favour of assessee has been accepted by the Government but still a clarificatory amendment may be made in the Act to avoid controversy.
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10. Depreciation on 'Goodwill'
Goodwill' can be described as 'premium' paid for acquiring a company or business. When one company acquires another company, purchase price paid over the net book value is termed as 'Goodwill'.
Goodwill, to a layman, appears be a term of positive connotation but this term is riddled with prolonged litigation in tax parlance. While the taxpayer has been arguing that Goodwill is eligible for depreciation, tax authorities term it as a mere book entry which does not fall within category of an 'Intangible asset' eligible for depreciation under Section 32.
The Supreme Court in the case of CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com 222 (SC) has put the above controversies into rest by ruling that Goodwill, being difference between amount paid and cost of shares, is an asset eligible for depreciation under Section 32 of the Act. The Supreme Court applied the principle of ejusdem generis and classified Goodwill as 'commercial rights of similar nature' in order to be eligible for depreciation.
Although judgment of the Supreme Court is considered as rule of land, but it is recommended that 'Goodwill' should specifically be classified as an intangible asset under the Act.
Computation of Actual Cost or written down value of 'Goodwill' in case of amalgamation or demerger is another issue which needs consideration. In the case of Chowgule & Company (P) Ltd. v. ACIT [2011] 10 taxmann.com 224 (Panaji), it was held by the tribunal that depreciation is not available on goodwill as its cost is nil.
In order to facilitate tax friendly corporate re-organisations and to remove all ambiguities surrounding the above issue, it is desirable that specific amendments are made to clarify the position beyond doubt. A decision to allow depreciation claim on the amount of goodwill recognised as per accounting norms will also ensure harmony between the accounting and tax norms.
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11. What is "Substantially financed by Government"?
Clauses (iiiab) and (iiiac) of Section 10(23C) provides an exemption from tax to educational institution or hospitals which is wholly or substantially financed by the Government. The CBDT has notified 50% as the limit for determining substantial funding by Government for the purposes of such provision.
In spite of CBDT's notification, the issue regarding expression substantially financed by the Government has always been confusing and debatable. In the recent past in the case of
CIT v. Indian Institute of Management [2014] 49 taxmann.com 136/226 Taxman 301 (Kar.) where it was held that initial contribution and contribution in kind should also be considered for determining "Substantially Financed by Government". Thus, it seems that the term "Substantially Financed by Government" is yet to be defined and resolved. It is important that distinction is drawn between the initial land and funding provided by the Government and the annual grant received from the Government.
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12. Marketing Intangibles – The Conundrum Continues…
"AMP" expenses refer to Advertising, Marketing and Promotional expenses incurred by a group or entity to promote its products and identity. In marketing terminology, such identity is called a 'brand'.
World over, tax authorities opine that a distributor of MNE products must be adequately compensated for the promotional activities undertaken by them. While the larger question is whether such expenditure incurred in India by an Indian entity and paid to un-related parties for brand development be tested for ALP under the TP provisions, there is increasing litigation as regards whether routine expenses be considered as part of brand development thereby enhancing the TP addition. This, certainly, is an unwelcome litigation for the assessee in India.
The Special Bench in
LG Electronics India ltd. v. ACIT [2013] 29 taxmann.com 300 (Delhi – Trib.) has made it very clear that AMP expenditure is subjected to TP provisions in India. Arguing on the legality of determination of ALP of such expenditure would certainly not find favour with any court in India. World over, the trend is towards determination of ALP using Bright Line Test or any other suitable method. However, the least that can be expected is putting certainty on what can be considered as AMP expenses. Segregation of AMP expenses into routine and non-routine and the basis of such bifurcation must be clearly brought out as an explanation in the definition of international transaction.
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13. Exempting carbon credit can help 'Swatchh Bharat' Mission
Carbon credit is an incentive for industries reducing CO2 emission by investing in energy efficient technology. For example, if a factory uses wind or solar power, instead of fossil fuels, like coal it would be entitled to carbon credits.
There is no clarity on carbon credits in tax law. The Department considers amount received from sale of carbon credits as revenue receipt, fully liable to tax.
Whereas, various courts and tribunals have held that the carbon credits are in the nature of an entitlement to improve world atmosphere and environment, reducing carbon, heat and gas emissions. Therefore, the amount received for carbon credit sale could not be taxed and the same should be considered as capital receipts.
As neither the legislature nor Supreme Court has ruled that carbon credits are not taxable, the Budget is expected to ensure that carbon credits would no longer be mired in tax dragnet and, therefore, Section 10 should be amended to exempt income from sale of carbon credits, unequivocally.
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14. Sale of 'listed shares' by NR to be taxed at 10% after giving impact to 1st proviso to Sec. 48
The first proviso to section 48 provides relief from exchange fluctuations to foreign companies and other non-residents purchasing shares of Indian companies in foreign exchange. Second proviso to section 48 provides for the benefit of indexation while computing the long term capital gain. Indexation relief is not available to assessees covered by first proviso.
As per section 112, tax on long term capital gains is levied at 20% (plus applicable surcharge and education cess). However, in case of transfer of listed securities, proviso to section 112 provides for concessional rate of tax (i.e., 10%) without giving benefit of indexation under the second proviso to section 48.
The issues arises whether a non-resident (which sells listed shares of an Indian company otherwise than on stock exchange) which is entitled to the benefit of the first proviso to section 48 can also have the benefit of 10% tax rate on capital gains?
The income-tax authorities have been disputing this issue in spite of the various judicial precedents wherein such benefit of concessional tax rate was allowed to such non-residents. It is recommended that the Finance Bill, 2015 should clarify this situation and allow concessional rate of tax of 10% to non-resident/foreign companies who are covered by first proviso to section 48.
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15. Section 6 should clarify meaning of 'Going abroad for the purpose of employment'
As per section 6(1)(c) an individual is said to be resident in India in any previous year, if he was in India for a period or periods amounting in all to 365 days or more in four years immediately preceding that year and is in India for a period or periods amounting in all to sixty days or more in that year This restriction of short stay of 60 days or more is not applicable to an Individual, leaving India for the purposes of employment during the previous year as he can avail benefit of bigger window of 182 days.
Unfortunately, the term leaving India for the purposes of employment is subjective and prone to multiple interpretations.In view of majority judicial views on the interpretation of the term 'leaving for the purposes of employment
', the reasonable and logical conclusion is that employment includes self-employment. The only relevant test for determining residential status of individuals in India is their physical presence in India for the stipulated number of days and visit and stay abroad should not be for other purposes other than employment/business.
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16. Meaning of education under section 2(15) for Charitable Institutions
The word 'education' has not been defined under the Act and meaning thereof always remained a subject matter of debate in India for the purposes of income-tax assessment and exemptions.
In the case of Sole Trustee, Loka Sikshana Trust v CIT [1975] 101 ITR 234, the Supreme Court held that the word 'education' in section 2(15) has been used to denote systematic instruction, schooling or training which led to the understanding that only institutions affiliated to boards and universities providing schooling which resulted in a degree or diploma are deemed to be institutions engaged in educational facility.
Courts have held that institutions allied to educational institutions which were providing normal schooling were also educational in nature. For example, institution conducting exams for diploma and degree courses were also treated as educational.
We have witnessed divergent views of judiciary in the recent past as regards meaning of the term 'education', thus, it is recommended that the forthcoming budget should provide clarity on meaning of this term under Section 2(15).
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17. Capital gains in case of retirement of partner from a firm without distribution of asset
Section 45(4) provides that the profit and gains arising from transfer of a capital asset by way of distribution of capital asset on the dissolution of a firm shall be chargeable to tax as the income of the firm in the previous year in which the said transfer takes place. But, the controversy arises when retirement of any partner may not necessarily results in distribution of capital assets of firm, which is the pre-condition to tax the capital gains under Section 45(4).
While dealing with the above controversy, various Courts have held that where retiring partner took cash towards value of his share in partnership firm and there was no distribution of capital assets among partners then it could not be said to be a case of transfer of capital asset so as to attract section 45(4).
Therefore, it is recommended that Section 45(4) should clearly specify whether any capital gain would arise on retirement of a partner from the partnership firm which does not result in distribution of any asset. Further, if capital gain arises on such retirement of partner, whether partnership firm or the partner shall be liable to pay on such capital gains?
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18. No TDS from payment of stake money to race horse owners
Prize money paid to the owners of winning horses, namely, for those horses who won or placed second, third, fourth and fifth in the race is called as 'Stake Money'.
The Karnataka High Court in the case of Bangalore Turf Club v. UOI [2014] 52 taxmann.com 290 (Karnataka)thwarted attempts of the AO who wanted to tax 'stake money' as 'winning from race horses' and, thereby, making payment thereof subject to TDS provisions under Section 194B and imposing a flat rate of tax at 30%.
It was held by the High Court that stake money is an income from owning and maintaining of race horses which cannot by any stretch of imagination fall in the definition of 'card game or other game of any sort' found in section 194B.
It is recommended that the Finance Bill, 2015 should clarify the above position in confirmation with the High Court judgments in Bangalore Turf Club case (Supra)
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19. Sec. 221 penalty to be levied for default in payment of interest
Section 221 of the Income-tax Act ('the Act') levies penalty on taxpayer when he has defaulted in payment of taxes. Whether such provision also covers the situation where taxpayers default in payment of interest or penalty has been matter of dispute. Thus, recovery of these sums has become difficult for the Department. It is expected that Section 221 may be amended to include 'any sum due and payable under the Act'. This would have a deterrent effect on defaulting taxpayers who refused to pay the interest and penalty.
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20. Is it fair to tax retention money even if attached liability is not extinguished?
Contracts with 'retention clause' gives right to the customer to keep some of the contract price until all requirements of the contract are met. The money so kept by the customer is called as 'Retention Money' and receipt thereof is contingent upon fulfilment of certain conditions.
The year in which retention money shall be taxable is the contagious issue being faced by the taxpayers.
Dept. tends to tax retention money even when it is coupled with liability, whereas, various High Courts have taken a stand that the retention money shall be taxed in the year in which it is receivable to the contractor as per the terms of the contracts.
So, it is recommended that necessary amendment should be made to clarify that the retention money shall be taxable in the year of receipt only
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21. Adjustment of TDS in case of cancellation of insurance policy during 'Free Look' period
IRDA allows policyholders to cancel the policy during the free look period (currently set to 15 days from the date of receiving the policy document). Policy holder is allowed to cancel only life and health insurances during such free look period. However, recently, IRDA has taken away free look period from health insurance policies having tenure of less than one year.
In case of cancellations of insurance policy during free look period, the commission income accrued/paid to agents is reversed or recovered. The Finance Bill, 2015 should provide a mechanism to adjust the taxes already deducted under section 194D and paid to the Central Government.
Following mechanism may be devised to adjust the TDS on commission which is no longer income of insurance agent:
(a) Refund may be granted of tax deducted from commission paid on insurance policies which are subsequently cancelled during free look period
(b) Carry forward of the TDS in ITR form to adjust it against tax liability of subsequent year*.
* This mechanism has been introduced in New ITR Forms for Assessment Year 2014-15. In new ITR forms, taxpayer can disclose the unclaimed TDS brought forward and TDS being claimed this year from amount brought forward.
22. Unsold flats of a Real Estate Developers should not be taxable
A real estate developer generally owns and holds unsold flats for the purpose of his business. He does not enter into the business of letting out properties on hire. Yet, in a number of cases, he has been asked to pay tax on the notional Annual Letting Value (ALV) of the unsold flats as income taxable under the head "Income from House Property".
Imposition of tax on the ALV of such unsold flats/properties causes unnecessary hardship in his case. The Finance Bill, 2015 should grant relief to Real Estate Developers wherein certain specified period should be allowed for selling out the flats after they are ready.
23. Measures to monitor functioning of an Electoral Trust
Electoral Trust is a Section 25 Company or a non-profit company created in India for orderly receipt of the voluntary contributions from any person and for distributing the same to the political parties.
At present, the measures contained in the Act are not adequate to monitor the functioning of an electoral trust; for examples, it does not contain any provision requiring an electoral trust to apply for and obtain registration under the Act or for cancelling registration of an electoral trust or any provision requiring it to submit its Return of Income.
It is hoped that forthcoming budget would contain necessary proposals to tackle such shortcomings in legislation in respect of income of political parties and electoral trusts.
24. Is there a need to define term "Month"?
The term 'month' has witnessed series of litigation between the assessee and the revenue but till date no definition has been provided for it under the Act.
Predominantly, the assessee have contended that the term 'month' has to be understood as a calendar month as defined under the General Clauses Act, whereas Revenue has contended that the term 'month' has to be understood as 30 days.
It is recommended that Finance Ministry should come out with an amendment by adding a definition to section 2 to the effect that the term 'month' means month as defined under section 3(35) of the General Clauses Act, 1897. Alternatively, if the Finance Ministry is of the view that the term 'month' should be restricted only to 30 days then an appropriate definition to that effect be introduced.
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25. Power of ITAT as regards stay of tax recovery beyond 365 days
The first proviso to section 254(2A) empowers the Tribunal to pass an order of stay of any proceedings relating to an appeal filed before it. However, third proviso to said section, restricts such power by providing that the period of stay allowed shall not in any case exceed 365 days.
So, as the Tribunal does not have the power to allow stay of tax recovery beyond 365 days even in cases where the delay in disposing of the case is not attributable to the assessee, the only two options left with assessee are as follows:
(a) Option 1- File writ petition before the High Court to extend the period of stay; or
(b) Option 2- Pay tax and wait for the final order of the Tribunal. But, this option would block working capital of the assessee.
Therefore, it is recommended that the third proviso to section 254(2A) must contain a rider that the order of stay shall stand vacated after 365 days only where the delay in disposing of the case is attributable to the assessee. Where the delay is not attributable to the assessee, the stay of the Tribunal must be available without any time limitation.
Alternatively, the Tribunal must be compelled to dispose of the case within the time limit by means of amendment to section 254 because every taxpayer cannot file a writ before the High Court for extension of order of stay against tax recovery.
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26. Is conversion of interest into share capital eligible for deduction under Section 43B?
As per Section 43B, certain specified expenditure, inter-alia, interest on loan payable to financial institution / banks is allowed as deduction only in case of actual payment of the same to the lender.
The Indian Legislature, in order to bring greater clarity on the nature of permissible deductions under section 43B, inserted two Explanations viz Explanation 3C and 3D wherein it was clarified that interest converted into a loan or borrowing shall not be deemed to have been actually paid.
Still there is no clarity on availability of deduction of interest when it is converted into equity shares of the borrower. Thus, it is recommended that Section 43B should be amended to clarify whether the interest converted into share capital would amount to actual payment of interest under Section 43B?
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27. Whether order of SetCom could be interfered with by the High Court or the Supreme Court?
There has been an increase in disagreement of the Income-tax Dept. with the decisions of SetCom particularly with reference to an interpretation given to a particular document. The result is that more and more decisions of ITSC are sought to be reviewed by the Income tax department.
In various judicial precedents it was held that the High Court or the Supreme Court could interfere and/or review an order passed by SetCom only if there is fault in decision making process, and not with decision itself. Thus, the forthcoming budget is expected to provide clarity on finality of decision passed by SetCom.
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28. Application for Advance Ruling should be allowed even after filing of return of income
The Authority for Advance Ruling does not allow the application if the question raised in it is already pending before any income-tax authority as provided in proviso1 to section 245R(2). Now, the moot question arises when the case would be deemed to be pending before an income-tax authority: (a) on filing of return of income; or (b) on issue of notice under Section 143(2) for scrutiny assessment?
The Supreme Court in the case of Sin Oceanic Shipping ASA Norway v. AAR [2014] 41 taxmann.com 444 (SC) affirmed the ratio laid down in the Mitsubishi Corporation, Japan, In re [2013] 40 taxmann.com 335 (AAR - New Delhi) that question raised in application for Advance Ruling will be considered as pending for adjudication before Income-tax Authorities, only when issues are shown in return and notice under Section 143(2) is issued. Thus, application for Advance Ruling is to be admitted which is filed after filing of return but prior to issue of notice under section 143(2).
Accordingly, it is expected that a clarification may be inserted in Section 245R to affirm the above.
29. Permit larger time-limit for payment by employer of employee's contribution to PF/ Superannuation funds
There are two streams of contributions to provident funds, ESI or other superannuation funds. First is the employer's contribution which is regulated by Section 43B of Act and second is the employee's contribution which is regulated by Section 36(1)(va) of the said Act.
Section 43B allows deduction of employer's contribution in relevant financial year if such contribution is deposited by employer in relevant fund by the due date of filing of return of income for such financial year.
In contrast, section 36(1)(va) allows deduction of employee's contribution to the employer only when employer remits such amount to the relevant fund by the due dates prescribed in the relevant statutes.
So, the controversy that arises is that Act does not allow deduction of employee's contribution on the same line as in case of employer's contribution.
Several courts have taken a view that the employee's contribution should also be allowed to be deducted if employer remits such contribution to the administrator of the funds before the due date of filing of return.
Therefore, it is recommended that necessary amendment to section 36(1)(va) be carried out to recognize the view taken by the several Courts that section 43B would also regulate the time limitation for payment of employee's contribution by the employer to the respective superannuation funds.
Indirect-Taxes
30. Service tax applicability on services provided by airline operators
Airline Operators collect Passenger Service Fee (PSF) and User Development Fee (UDF) on behalf of Airport Authority of India (AAI) from passengers. Service Tax Department demands service tax on such PSF/UDF from Airline Operators.
However, Airline Industry, as a whole, has taken a position that PSF/UDF collected on behalf of AAI is subject to Service tax at the hands of AAI and not Airline operators as service of maintenance and security at airport to passengers is provided by AAI and not by Airline operators. Even various Tribunals have granted stay on collection of Service tax and waiver from pre-deposit of Service tax demanded, pending adjudication of Appeal, on this ground.
It is recommended that Government must clarify the taxability of PSF/UDF by excluding it from value of taxable services of Airline Operators
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31. Cenvat used solely in dutiable goods must be allowed while making reversal for exempted goods
The formula prescribed under Rule 6(3A) segregates CENVAT credit attributable to exempted goods and services. For this purpose, the formula uses 'total CENVAT credit taken'. The question arises whether this expression connotes credit common to exempted and taxable goods/services only or credit being total of 'credit pertaining to exempted and taxable goods/services' and 'credit exclusively attributable to taxable goods/services'.
In the case of Chennai Petroleum Corporation Ltd., In re[2012]286 ELT 467, it was held that Rule 6 is only for common inputs and input services. However, recently, in Thussenkrupp Industries (I) (P.) Ltd. v. CCE [2014] 52 taxmann.com 418 (Mumbai – CESTAT), it was held that while making reversal, total credit (including that relating exclusively to taxable goods/services) will be used.
It is recommended that Government must clarify the situation and make formula under rule 6(3A) expressly for common credit
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