Circular No. 62/11/2003
21st August, 2003
F. No. B3/7/2003-TRU
Government of India
Ministry of Finance
Department of Revenue
Tax Research Unit
Subject: Miscellaneous issues relating to the services on which service tax has been imposed with effect from 1-7-2003.
1.1 Commissioning or installation of plant, equipment or machinery by a commissioning or installation agency, is chargeable to service tax. A doubt has been raised as to whether the services like a plumber putting up a water tank, fitting pipes and tubing, an electrician putting up electric wire and fittings, installation of booster motors, air conditioners, water filters, hand-pumps, water heaters etc. will be chargeable to service tax.
1.2 As commonly understood, the activity of installation means the act of putting an equipment, machinery or plant into its place and making it ready for use. The activity of installation will start after erection which would refer to putting up civil structures. Commissioning of a plant would mean operationalising an installed plant/equipment/machinery. In this backdrop it is clarified that putting up a water tank, piping, electric wiring, in a residential premises etc. would not be covered in the definition of taxable service and thus would not be taxable. However, installing a booster pump, air-conditioner, water filter, water heater etc. would be covered in the definition and be taxable, as all these things are machinery or equipment.
1.3 Notification No.18/2003-Service Tax dated 21-8-03 has been issued which exempts commission or installation services provided by a commissioning or installation agency other than a commercial concern. Accordingly the commissioning or installation services provided by an individual will be exempt from service tax.
1.4 Notification No. 19/2003-Service Tax dated 21-8-03 has been issued which provides that in case of a contract which involves the commissioning or installation service alongwith supply of plant, machinery or equipment, service tax will be payable only on 33% of the gross amount charged for commissioning or installation and supply of plant, machinery or equipment. It is optional for the assessee to avail of this notification. It is emphasized under this notification that the gross amount (33% of which is chargeable to service tax) shall include the value of the plant, machinery, equipment, parts and any other material sold by the service provider alongwith the commission or installation service. The benefit of this notification can be availed for a contract only if the exemption under notification 12/2003-Service Tax dated 20-6-2003 is not availed for that contract.
1.5 Corrigendum to Circular No. 59/8/2003: In Service Tax Circular No. 59/8/2003, dated 20th June 2003, in paragraph 2.6,-
(i) in the first sentence the words “commercial coaching and training” may be read as “commissioning or installation” ;
(ii) in the first bullet the sentence “It is submitted that it has been provided in law that service tax is leviable on erection and commissioning charges only and not on the material and goods supplied.” may be read as “It is clarified that it has been provided in law that service tax is leviable on commissioning or installation charges only and not on the material and goods supplied.”
2.1 The definition of Business Auxiliary Service in the law excludes the Information Technology (IT) services. As per the definition IT service means any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. It was clarified in Circular No. 59/8/2003, dated 20th June 2003 that only if the output service provided by a service provider is in the nature of the above operations, such exclusion would operate. The mere fact that a personal computer or a laptop has been used for providing the service does not, ipso facto, make the service an information technology service. Similarly, the fact that any of the IT services has been used by the service provider as an input service does not automatically make the output service an IT service.
2.2 A doubt has been raised that the clarification in the said circular dated 20-6-03, is at odds with the letter F.No.334/1/2003-TRU dated 28-2-2003 which states, “However computer enabled services, namely, data processing, networking, back office processing, computer facility management shall not be subjected to Service Tax.” It is claimed that back office processing may include accounts outsourcing or payroll-processing activities etc. and such service may not be primarily in relation to computer system.
2.3 It is clarified that there is no contradiction between the clarifications dt.28-2-03 and dt.20-6-2003. The scope of IT services is explained in the definition of Business Auxiliary Service in the Act itself as any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. The last words “primarily in relation to operation of computer systems” make the intention abundantly clear. The words “back office processing” used in the clarification dated 28-2-2003 have to be read in conjunction with the other terms used therein viz. data processing, networking, computer facility management. Thus any service of back office processing primarily in relation to operation of computer system will be covered as IT services and not taxable. Payroll-processing, accounts management etc. even by using computer programs, can not be termed as activities primarily in relation to computer systems. The use of computer in these services is secondary and the primary activity is that of business-related work. Thus these services will be taxable as Business Auxiliary Services. This is exactly the position that has been clarified in the circular dated 20-6-2003.
3.1 Maintenance or repair services rendered under contracts entered into prior to 1-7-2003 are exempted from service tax if the bills are raised, and payment also made, prior to 1-7-2003 (notification No.11/2003-ST dated 20-6-03). In this context a doubt has been raised as to whether service tax would still be chargeable in cases where though the bills are raised, or payment made, after 1-7-2003, but the service was rendered prior to 1-7-2003.
3.2 It is a basic principle that no tax can be charged except under authority of law. Thus, if the levy of service tax on a particular service comes into force on a given date, that service will not be taxable if rendered before that date. The levy of service tax on “Maintenance or repair service” has come into force on 1-7-2003. Accordingly any maintenance or repair service rendered prior to 1-7-2003 will not be taxable, irrespective of when the bills are raised or payment made. This will apply to other services as well which were rendered prior to the imposition of service tax on them.
3.3 Notification No. 20/2003-Service Tax dated 21-8-03 has been issued which exempts services in relation to maintenance or repair of computers, computer systems and computer peripherals.
4.1 With regard to services provided by money changers, a doubt has been raised whether all trading in foreign exchange will be chargeable to service tax.
4.2 Prior to 1-7-2003 the service of “securities and foreign exchange (forex) broking”, when provided by banking company/financial institution/body corporate was liable to service tax. Through Finance Act, 2003 “foreign exchange broking” when provided by foreign exchange brokers, other than banking company/financial institution/body corporate, were also brought under the tax net w.e.f 1-7-2003. As per the definition in law foreign exchange brokers include authorized dealers of foreign exchange. Authorised dealer of foreign exchange has been assigned the meaning of “authorized person” under the FEMA, 1999. Accordingly authorized dealers/money changer etc. which are authorized to deal in foreign exchange are covered in the definition of “foreign exchange brokers” under service tax provisions. However, as explained above only the service of “foreign exchange broking” when provided by foreign exchange brokers (other than banking company/financial institution/body corporate which are already covered) has been brought under the tax net.
5.1 In the context of certain services, a doubt has been raised as to whether service tax will be payable if the service is provided free of charge.
5.2 As per charging section viz. section 66 of the Act, service tax is chargeable at the rate of 8% of the value of taxable service. Thus if the value is zero the tax will also be zero even though the service is taxable.
Joint Secretary (TRU)