‘Service’ has been defined in clause (44) of the new section 65B and means –
any activity for consideration
carried out by a person for another
and includes a declared service
does not include –
any activity that constitutes only a transfer in title of (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
a transaction only in (iv) money or (v) actionable claim
a service provided by an employee to an employer in the course of the employment.
fees payable to a court or a tribunal set up under a law for the time being in force.
ACTIVITY FOR A CONSIDERATION
The concept ‘activity for a consideration’ involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e. without the express or implied contractual reciprocity of a consideration would not be an ‘activity for consideration’ even though such an activity may lead to accrual of gains to the person carrying out the activity. Example An artist performing on a street does an activity without consideration even though passersby may drop some coins in his bowl kept after feeling either rejoiced or merely out of compassion. They are, however, under no obligation to pay any amount for listening to him nor have they engaged him for his services. On the other hand if the same person is called to perform on payment of an amount of money then the performance becomes an activity for a consideration.
Consideration = Monetary + Non Monetary
Fines and penalties which are legal consequences of a person’s actions are not in the nature of consideration for an activity because to be a service an activity has to be carried out for a consideration.
Would the payments in the nature as explained in column A of the table below constitute a consideration for provision of service?
CARRIED OUT BY A PERSON FOR ANOTHER
‘provided by one person to another’ signifies that services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice-versa.
There are two exeptions of this:-
– an establishment of a person located in taxable territory and another establishment of such person located in non-taxable territory are treated as establishments of distinct persons.
– an unincorporated association or body of persons and members thereof are also treated as distinct persons.
Implications of these deeming provisions are that inter-se provision of services between such persons, deemed to be separate persons, would be taxable. For example, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multi-national company located outside India would be taxable provided other conditions relating to taxability of service are satisfied.
Declared Services are activities that have been specified in Section 66 E of the Act. When such activities are carried out by one person for another in the taxable territory for a consideration then such activities are taxable services.
SERVICES PROVIDED BY GOVT. OR LOCAL AUTHORITIES
Government and local authorities are also liable to pay tax. However, most of the services provided by the Government or local authorities are in the negative list.
The rationale behind taxing certain activities of the Government or local Authorities is:-
– to provide a level playing field to private entities in these areas as exemption to Government in such activities would lead to competitive inequities; and
– to avoid break in Cenvat chain as the support services provided by Government are normally in the nature of intermediary services.
Government = Central Government + State Government
If services are provided by one department of the Central Government to another department of the Central Government or by a department of a State Government to another department of the same State Government then such service would not be taxable as it would amount to self-service. If a service is provided by a Central Government department to a State Government department or vice versa or a by a State to another State Government or by a Government to an autonomous body, the same would be taxable if such service does not fall in the negative list. It is another matter that most of the services provided by the Government are in the negative list.
A. ACTIVITY TO BE TAXABLE SHOULD NOT CONSTITUTE ONLY A TRANSFER IN TITLE OF GOODS OR IMMOVABLE PROPERTY BY WAY OF SALE, GIFT OR IN ANY OTHER MANNER
Mere transfer of title in goods or immovable property by way of sale, gift or in any other manner for a consideration does not constitute service.
Goods has been defined in section 65B of the Act as ‘every kind of moveable property other than actionable claims and money and includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under contract of sale’.
Immovable property has not been defined in the Act. Therefore the definition of immovable property in the General Clauses Act, 1897 will be applicable which defines immovable property to include land, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth.
‘Transfer of title’ means change in ownership. For example giving the property on rent or goods for use on hire would not involve a transfer of title.
significance of the word ‘only’ in the said exclusion clause:-
The word ‘only’ signifies that activities which constitute only:
transfer of title in goods or immovable property; or
transfer , supply or delivery which is deemed to be a deemed sale of goods or constitute; or
a transaction in money or an actionable claim are outside the definition of service.
A transaction which in addition to a transfer of title in goods or immovable property involves an element of another activity carried out or to be carried out by the person transferring the title would not be out rightly excluded from the definition of service. For example a builder carrying out an activity for a client wherein a flat is constructed by the builder for the client for which payments are received in installments and on completion of the construction the title in the flat is transferred to the client involves two elements namely provision of construction service and transfer of title in immovable property. The two activities are discernibly separate. The activity of construction carried out by the builder would, therefore, be a service and the activity of transfer of title in the flat would be outside the ambit of service.
In cases of composite transactions, i.e. transactions involving an element of provision of service and an element of transfer of title in goods in which various elements are so inextricably linked that they essentially form one composite transaction then the nature of such transaction would be determined by the application of the dominant nature test laid down by the Supreme Court in BSNL’s case.
The relevant paras of the said judgment are reproduced below –
Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been Constitutionally permitted , there is no other service which has been permitted to be so split.
For example the clauses of Article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.
The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley’s case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be – did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls in to one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test.”
The following principles emerge from the said judgment for ascertaining the taxability of composite transactions-
1. Except in cases of works contracts or catering contracts composite transactions cannot be split into contracts of sale and contracts of service.
2. The test whether a transaction is a ‘composite transaction’ is that did the parties intend or have in mind that separate rights arise out of the constituent contract of sale and contract of service. If no then such transaction is a composite transaction even if the contracts could be disintegrated.
3. The nature of a composite transaction, except in case of two exceptions would be determined by the element which determines the ‘dominant nature’ of the transaction.
-If the dominant nature of such a transaction is sale of goods or immovable property then such transaction would be treated as such.
– If the dominant nature of such a transaction is provision of a service then such transaction would be treated as a service and taxed as such even if the transaction involves an element of sale of goods.
4. If the transaction represents two distinct and separate contracts and is discernible as such then contract of service in such transaction would be segregated and chargeable to service tax if other elements of taxability are present. This would apply even if a single invoice is issued.
The principles explained above would, mutatis mutandis, apply to composite transactions involving an element of transfer of title in immovable property or transaction in money or an actionable claim.
As per the definition of ‘service’ only activities which are in the nature of transfer of title in goods (which includes securities) are excluded. As a consideration for the transfer of title in mutual funds the investors pay amounts equal to NAV of the mutual fund. Entry or exit loads are in the nature of consideration for documentation, covering initial expenses, asset management etc. Hence service tax would be leviable on such entry and exit loads. Service tax would also be leviable on fund management activity undertaken by an asset management company (AMC) for which an AMC charges the mutual fund an ‘investment and advisory fee’, in accordance with provisions contained in the SEBI regulation.
B. DEEMED SALES ARE EXCLUDED FROM THE DEFINATION OF SERVICE
The six categories of deemed sales as defined in article 366(29A) of the Constitution are –
1. transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration
2. transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract
3. delivery of goods on hire-purchase or any system of payment by installments
4. transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration
5. supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration
6. supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration.
Some categories of deemed sales do not involve transfer of title in goods like transfer of goods on hire-purchase or transfer of right to use goods. Accordingly, deemed sales have been specifically excluded.
C. A TRANSACTION ONLY IN MONEY OR ACTIONABLE CLAIMS
Example of Activities under ‘transaction only in money’:-
Actionable claims means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent. Example Unsecured Debts, Right to participate in the draw to be held in a lottery.
D. SERVICE PROVIDED BY EMPLOYEE TO EMPLOYER
Services that are provided by the employee to the employer in the course of employment are outside the ambit of services. Services provided outside the ambit of employment for a consideration would be a service. For example, if an employee provides his services on contract basis to an associate company of the employer, then this would be treated as provision of service.
Amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would not be chargeable to service tax. However any amount paid for not joining a competing business would be liable to be taxed being paid for providing the service of forbearance to act.
Compiled by -Mohit Jindal
Email – [email protected]