R. Kumar, B.Com. MBA (Finance)
The definition of service in the first instant is very wide to cover any transaction done for a consideration. However, there exist few activities which would overlap with the other levies of state with a marginal difference, thereby questioning the constitutional validity of the levy under service tax. In some cases there may be a doubt whether that activity could possibly called a service at all. To rest the doubt about the validity of a transaction to be considered as service, the authority has intended to declare such activities to be a service. To give an instance, the first declared service “renting of immovable property service” was challenged as to whether it was a “service” as well as the competence of the Union to levy the tax on a property, which is a subject to state governance. Similarly most of the declared services were challenged. For all events and purposes these transactions shall be deemed to be service.
Declared Services are defined under Sec. 65B (22) of the Finance Act, 1994 to mean any activity carried out by a person for another person for consideration and declared as such under Sec. 66E of the Finance Act, 1994. It means for a service to come under the category of declared services, it has to satisfy two basic conditions conjunctively:
a. it must be an activity by one person to another for consideration
b. it must be specified(i.e. declared) under Sec. 66E
In accordance with clause (44) of the newly inserted Sec. 65B of the Finance Act,1994 effective from July 1,2012, the term ‘service’ means any activity for consideration carried out by a person for another and includes a declared service. Thus, whenever any activity is carried out in the taxable territory for a consideration by one person for another then such activity is taxable service.
The word ‘Activity’ has not been defined in the Act and therefore it is a term with very wide connotation to include an act or work done, to tolerate an act or a situation, any performance of an act, an operation carried out, provision of a facility etc.
However, certain activities have been specifically defined by its description as service which is known as “declared services” and the same phrase been defined under Sec.65B(22) as any activity carried out by a person for another person for consideration and declared as such under Sec.66E.
The following nine activities have been specified in Sec.66E and these activities when carried out by a person for another for consideration would amount to provision of service:
i. renting of immovable property;
ii. construction of a complex, building, civil structure or a part thereof
iii. temporary transfer or permitting the use or enjoyment of any intellectual property right;
iv. Services in relation to information technology software;
v. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;
vi. transfer of goods by without transfer of right to use such goods;
vii. activities in relation to delivery of goods on hire purchase or any system of payment by installments;
viii. service portion in the execution of a works contract;
ix. service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.
Now we will discuss each of them in coming paras in more detail
1) Renting of Immovable Property:
The term ‘renting’ has been defined in Sec.65B(41) as “allowing, permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property”.
The renting of immovable property has been upheld in the mentioned cases i.e. Shumb Timb Steels Ltd. Vs. UOI [(2010) 20-STR-737(P&H),
Utkal Builders Ltd. Vs. UOI [(2011) 22-STR-257 (Ori.)],
Retailers Association of India & Ors Vs. UOI & Ors. [(2011) 23-STR-566 (Bom.)], Cinemax India Ltd Vs. UOI [(2011) 24-STR-3 (Guj.)],
M/s Home Solutions Retail India Ltd & Others Vs. UOI and Or [(2011) 24-STR-129 (Del)].
Under Renting Inclusions and exclusions:
|Renting of vacant land, with or without a structure incidental to its use, relating to agriculture.||Renting of precincts of a religious place meant for general public is exempt.|
|Renting of residential dwelling for use as residence.||Renting of a hotel etc, having declared tariff below rupees 1000 per day|
|Renting out of any property by Reserve Bank of India.||To Educational institutes|
|Renting out of any property by a Government or a local authority to all non-business entity.|
2) Construction of a complex, building, civil structure or a part thereof :
Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority. The term “construction” includes additions, alterations, replacements or remodeling of any existing civil structure.
In a judgement passed by the Mumbai High Court in the case of Maharashtra Chamber of Housing Industry and Others Vs. Union of India [012-TIOL-78- HC-Mum-ST] has upheld the Constitutional validity of levy of service tax, under clauses (zzzh) and (zzzzu) of Sec. 65, on similar construction services provided by a builder. A relevant portion of the judgement is reproduced below-
“29. The charge of tax under Section 66 of the Finance Act is on the taxable services defined in clause (105) of Section 65. The charge of tax is on the rendering of a taxable service. The taxable event is the rendering of a service which falls within the description set out in sub-clauses (zzq), (zzzh) and (zzzzu). The object of the tax is a levy on services which are made taxable. The fact that a taxable service is rendered in relation to an activity which occurs on land does not render the charging provision as imposing a tax on land and buildings. The charge continues to be a charge on taxable services. The charge is not a charge on land or buildings as a unit. The tax is not on the general ownership of land. The tax is not a tax which is directly imposed on land and buildings. The fact that land is subject to an activity involving construction of a building or a complex does not determine the legislative competence of Parliament. The fact that the activity in question is an activity which is rendered on land does not make the tax a tax on land. The charge is on rendering a taxable service and the fact that the service is rendered in relation to land does not alter the nature or character of the levy. The legislature has expanded the notion of taxable service by incorporating within the ambit of clause (zzq) and clause (zzzh) services rendered by a builder to the buyer in the course of an intended sale whether before, during or after construction. There is a legislative assessment underlying the imposition of the tax which is that during the course of a construction related activity, a service is rendered by the builder to the buyer. Whether that assessment can be challenged in assailing constitutional validity is a separate issue which would be considered a little later. At this stage, what merits emphasis is that the charge which has been imposed by the legislature is on the activity involving the provision of a service by a builder to the buyer in the course of the execution of a contract involving the intended sale of immovable property.
3) Temporary use of Intellectual property Rights:
Intellectual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. Temporary transfer or permitting the use or enjoyment of any intellectual property right viz. i) know-how, ii) patents, iii) copyrights, iv) trade-marks, v) licences, vi) franchises; or vii) any other business or commercial rights of similar nature.
Provision of IPR registered outside India is covered under this service category. In the case of Redaan Media Works (I) Ltd. Vs. CST, Chennai [(2010) 19-STR-740(Tri.-Chennai)], Tribunal held that permanent transfer of IPR is not taxable.
4) Information Technology Software Service:
The term ‘information technology software’ has been defined in Sec.65B of the Act as any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of manipulated or providing interactivity to a user, by means of computer or an automatic data processing machine or any other device or equipment.
Site Development of software, Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software has been included as a information technology software.
Packaged information technology software is being exempted from service tax provided either the customs duty or excise duty has been paid on the entire amount received from the buyer.
In the case of Infotech Software Dealers Assn. Vs. UOI [(2010)] 29-STT-132 (Mad.)], Court held that, Software transaction sale or service depends upon the terms of end user licence Agreement. If right to use of software provided then Sale.
5) Agreeing to do or not to do an Act:
Agreeing to the obligation, or to the act to refrain from an act, or to tolerate an act or a situation, or to do an act. Therefore, non-compete fees would be taxable.
In the case of Landboden-Agradienste GmbH & Co. KG Vs. Finanzamt Calau [(2012) 36-STT-11(ECJ)] it has been held that there cannot be provision of services without a consumption of same specific consumer required for such service.
6) Supply of property without transfer of right to use:
Transfer of goods by way of hiring, leasing , licencing or any such manner without transfer of right to use such goods. None that transfer of right to use any goods is leviable to sales tax/VAT as deemed sale of goods as per Article 366(29A)(d) of the Constitution of India.
In a famous case BSNL Vs. UOI [(2006) 2-STR-161 (SC), the Supreme Court has clarified that following ingredients may be used for determining the transfer of right to use:
a. There must be goods available for delivery;
b. There must be a consensus ad idem( consent to the same) as to identity of the goods;
c. The transferee should have legal right to use the goods and consequently all legal consequences of such use including any permissions or licences required therefore should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor- this is necessary concomitant of the plain language of the statute, viz., ‘a transfer of the right to use’ and not merely a license to use the goods;
e. Having transferred, the owner cannot again transfer the same right to others.
7) Delivery of goods on Hire Purchase:
Activities in relation to delivery of goods on hire purchase or any system of payment by installments have been included as part of taxable services.
Accordingly, the delivery of goods on hire purchase or any system of payment on installment is not chargeable to service tax because as per Article 366(29A) of the Constitution of India such delivery of goods is deemed to be a sale of goods. However, activities or services provided in relation to such delivery of goods are covered in this declared list entry.
In the case of Association Of Leasing & Financial Service Companies Vs. Union Of India [(2010) 20-STR-417(SC)], Supreme Court held that in equipment leasing/hire-purchase agreements there are two different and distinct transactions, viz., the financing transaction and the equipment leasing/hire-purchase transaction and that the financing transaction, consideration for which was represented by way of interest or other charges like lease management fee, processing fee, documentation charges and administrative fees, which is chargeable to service tax.
8) Works Contract:
Works contract has been defined in section 65B of the Act as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.
Service portion in execution of a works contract. Naturally every work contract involves an element of sale of goods and provision of service. Further the Supreme Court in BSNL’s case [ (2006) 2-STR-161 (SC)] declared that a work contract can be segregated into a contract of sale of goods and contract of provision of service.
However, in terms of Article 366(29A) of the Constitution of India transfer of property in goods involved in execution works contract is deemed to be sale of such goods.
9) Services of supply of food or drinks for human consumption:
Services portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity. It shall also include where services are provided during provision of food or drinks for human consumption as in the case of restaurants, or outdoor catering etc.
In terms of article 366(29A) of the Constitution of India supply of any goods, being food or any other article of human consumption or any drink (whether or not intoxicating) in any manner as part of a service for cash, deferred payment or other valuable consideration is deemed to be a sale of such goods. Such a service therefore cannot be treated as service to the extent of the value of goods so supplied. The remaining portion however constitutes a service. It is a well settled position of law, declared by the Supreme Court in BSNL‘s case [2006(2)STR161(SC)], that such a contract involving service along with supply of such goods can be dissected into a contract of sale of goods and contract of provision of service.
Exemption under Notification 25/12 dt. 20.06.2012
Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a license to serve alcoholic beverage. (Para 19 of 25/12 dt. 20.06.2012).
The author is reachable at [email protected]