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A Rs 21-crore notice to Jaypee Sports International, a subsidiary of Jaiprakash Associates, is on its way for alleged evasion of service tax on acquisition of the rights to host and stage the Formula 1 motor sports race.
In October 2011, the first Formula One Grand Prix was organised by Jaypee Sports. The company entered into a contract with Formula One World Championship (FOWC) of the UK to acquire the right to host and stage Formula 1 for Rs 197 crore. It allegedly did not pay any service tax on the amount paid.
The directorate general of Central Excise Intelligence (DCCEI) said the company was liable to pay service tax under the reverse charge mechanism in the taxable service category of "franchisee services". Usually, the tax is paid by the service provider but in a reverse charge mechanism, it is paid by the service recipient.
Jaypee Sports has contested the claims and said the service did not fall under any taxable category before the introduction of the negative list in July 2012. "Jaypee has agreed to pay tax on the amount paid after the introduction of the negative list in 2012 but they are contesting the tax demand in the earlier period," said a finance ministry official, who did not wish to be identified. A Jaypee spokesperson declined to comment.
After the introduction of the negative list last year, all services barring those mentioned on the list became taxable. As the service received by Jaypee Sports was not mentioned in the negative list, the company was asked to pay service tax on the amount paid under "race promotion contract".
Jaypee had organised the second Formula 1 Grand Prix in October 2012. Accepting the view of the tax authorities, it deposited a service tax of Rs 13.78 crore on part-payment of Rs 111 crore to FOWC. The DGCEI said the company had paid service tax at 2.5 per cent on external or internal development charges, instead of the full rate of 10.3 per cent or 12.3 per cent (service tax rate was raised from 10 per cent to 12 per cent, besides cess, in the 2012-13 Budget). It has deposited Rs 1.56 crore as interest, too. Thus, a total of 15.35 crore has been deposited by the company but the Rs 21 crore demand on services taken before July 2012 remains.
Levy of service tax has been an area of dispute between the government and companies since the instruction of this tax about two decades earlier. As this is a relatively new area of taxation, companies often dispute the claims of tax authorities and many cases are being fought at various levels.
