Despite doing away with the service-specific descriptions, there will be some descriptions where some differential treatment will be available to a service or a class of services. Section 66F lays down the principles of interpretation of specified descriptions of services and bundled services. But before going on to Section 66F, let us understand what Service is.
Service as defined in section 65B(44) means:
The said definition further provides that ‘Service’ does not include –
i. goods or
ii. immovable property by way of sale, gift or in any other manner
iii. a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution
Principles for interpretation of specified descriptions of services:
The principle to interpret description of service are contained in Section 66F of Finance Act, 1994 introduced w.e.f. 01.07.2012
1. Exemption to Service does not mean exemption to services for providing that service:
Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service. For example – If construction of a Government Building is exempt (main service), architect or labour supplier providing service to builder/contractor for such contract will not be able to avail that exemption.
2. Specific description prevails over general description:
Where a service is capable of differential treatment for any purpose on its description, the most specific description shall be preferred over a more general description. For example – A hotel rents out a conference room for an official conference where lunch is also served. It can be classified as ‘Mandap keeper’ or ‘Convention Service’. Between these two entries, ‘Convention Service’ is more specific as it covers an only convention which is like official function. ‘Mandap Keeper’ is general description as it includes official, social as well as business functions. The services provided by a real estate agent are in the nature of intermediary services relating to immovable property. As per the Place of Provision of Service Rule, 2012, the place of provision of services provided in relation to immovable property is the location of the immovable property. However in terms of the rule 5 pertaining to 126 services provided by an intermediary the place of provision of service is where the intermediary is located. Since Rule 5 provides a specific description of ‘estate agent’, the same shall prevail.
3. Service which gives essential character:
‘Bundled service’ means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of ‘bundled service’ would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different. Subject to the provisions of sub section (2), the taxability of a bundled service shall be determined in the following manner, namely:
a) Naturally Bundled
If various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character. Example of naturally bundled service is ‘package tour’, where service provider offers to provide service right from pickup, travel, hotel accommodation, sight seeing, etc.
b) Not Naturally Bundled:
If various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of Service Tax. For example – Premises are rented which are partly for residential purposes and partly for manufacturing activity. Thus, it is not service bundled in ordinary course of business. In such case, though residential use is not taxable, commercial use is taxable. Hence, the entire bundle will be treated as renting of commercial property.
Determination of taxability if ‘Composite Transactions’ wherein element of provision of Service is combined with element of sale of goods:
Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below:
a) Perception of consumer and service receiver
If large number of service receivers of such bundle of services reasonably expects such services to be provided as a package, then such a package could be treated as naturally bundled in the ordinary course of business.
b) Majority of service providers in a particular area of business providing similar bundle of services
For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
c) The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main services and the other services combined with such services are in the nature of incidental or ancillary services which help in better enjoyment of a laundering of 3-4 items clothing free of cost per day. Such service is ancillary services to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
d) Other illustrative indicators, not determined but indicative of bundling of services in ordinary course of business are:
i. There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use,
ii. The elements are normally advertised as a package,
iii. The different elements are not available separately,
No straight jacket formula can be laid down to determine whether a service is a naturally bundled in the ordinarily course of business. Each case has to be individually examined.
Although the negative list approach largely obviates the need for descriptions of services, such descriptions continue to exist in the following areas:
a) In the negative list of services.
b) In the declared list of services.
c) In exemption notifications.
d) In the Place of Provision of Service Rules, 2012
e) In a few other rules and notifications e.g. Cenvat Credit Rules, 2004.
Scope of Section 66F(1):
‘Unless otherwise specified, reference to a service (hereinafter referred to as the “main service”) shall not include reference to a service which is used for providing the main service’. This rule can be best understood with a few illustrations which are given below –
a. Provision of access to any road or bridge on payment of toll’ is a specified entry in the negative list in section 66D of the Act. Any service provided in relation to collection of tolls or for security of a toll road would be in the nature of service used for providing such specified service and will not be entitled to the benefit of the negative list entry.
b. Transportation of goods on an inland waterway is a specified entry in the negative list in section 66D of the Act. Services provided by an agent to book such transportation of goods on inland waterways or to facilitate such transportation would not be entitled to the negative list entry.
The rules of interpretation have to be done in very careful manner. Such as in case of Construction of Roads, Dams, etc., if one receives part work of the same as sub contract being architect service or earth work which is taxable in their individual nature, one may think it to be exempt as Mega Exemption clause 28(viii) states that Service by the following person in respective capacities – Sub Contractor provides services by way of Work Contract to another Contractor providing work contract service which are exempt and these roads and dams are exempt under Mega Exemption Clause 13(1). But, the same is not true as these are taxable. The same has been clarified by many circulars and CBEC guidance note whose extract is quoted here:
As per clause (1) of section 66Freference to a service by nature or description in the Act will not include reference to a service used for providing such service. Therefore, if any person is providing services, in respect of projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc., such as architect service, consulting engineer service ., which are used by the contractor in relation to such construction, the benefit of the specified entries in the mega-exemption would not be available to such persons unless the activities carried out by the sub-contractor independently and by itself falls in the ambit of the exemption.
It has to be appreciated that the wordings used in the exemption are ‘services by way of construction of roads etc’ and not ‘services in relation to construction of roads etc’. It is thus apparent that just because the main contractor is providing the service by way of construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc., it would not automatically lead to the classification of services being provided by the sub-contractor to the contractor as an exempt service.
However, a sub-contractor providing services by way of works contract to the main contractor, providing exempt works contract services, has been exempted from service tax under the mega exemption if the main contractor is engaged in providing exempt services of works contracts. It may be noted that the exemption is available to sub-contractors engaged in works contracts and not to other outsourced services such as architect or consultants.
Commission agent or a clearing and forwarding agent who sells goods on behalf of another for a commission be included in trading of goods
The answer is No. The services provided by commission agent or a clearing and forwarding agent are not in the nature of trading of goods. These are auxiliary for trading of goods. In terms of the provision of clause (1) of section 66F reference to a service does not include reference to a service used for providing such service. Moreover the title in the goods never passes on to such agents to come within the ambit of trading of goods.
In case a person provides a composite service of providing space for advertisement that is covered in the negative list entry coupled with taxable service relating to design and preparation of the advertisement
This would be a case of bundled services taxability of which has to be determined in terms of the principles laid down in section 66F of the Act. Bundled services have been defined in the said section as provision of one type of service with another type or types of services. If such services are bundled in the ordinary course of business then the bundle of services will be treated as consisting entirely of such service which determines the dominant nature of such a bundle. If such services are not bundled in the ordinary course of business then the bundle of services will be treated as consisting entirely of such service which attracts the highest liability of service tax.
Collection charges or service charges paid to any toll collecting agency
The answer is No. The negative list entry only covers access to a road or a bridge on payment of toll charges. Services of toll collection on behalf of an agency authorized to levy toll are in the nature of services used for providing the negative list services. As per the principle laid down in sub section (1) of section 66F of the Act the reference to a service by nature or description in the Act will not include reference to a service used for providing such service.
Boarding schools provide service of education coupled with other services like providing dwelling units for residence and food. This may be a case of bundled services if the charges for education and lodging and boarding are inseparable. Their taxability will be determined in terms of the principles laid down in section 66F of the Act. Such services in the case of boarding schools are bundled in the ordinary course of business. Therefore the bundle of services will be treated as consisting entirely of such service which determines the dominant nature of such a bundle. In this case since dominant nature is determined by the service of education other dominant service of providing residential dwelling is also covered in a
separate entry of the negative list, the entire bundle would be treated as a negative list service.
(Author ‘Sagar Gupta’ is an innovative leader in delivering corporate advisory & solutions and can be reached at [email protected])