Himanshu Dhakad
Aggregator Service:
The term “aggregator” has been defined under Service Tax Rules, 1994 as “a person, who owns and manages a web-based software application, and by means of the application and a communication device, enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator”.
In addition, a corresponding change was made in the meaning of the term “person liable to pay service tax” in the Service Tax Rules, 1994 to include the term “aggregator”. The relevant extract is as follows:
“in relation to the service provided or agreed to be provided by a person involving an aggregator in any manner, the aggregator of the service:
– Provided that if the aggregator does not have a physical presence in the taxable territory, any person representing the aggregator for any purpose in the taxable territory shall be liable for paying service tax;
– Provided further that if the aggregator does not have a physical presence or does not have a representative for any purpose in the taxable territory, the aggregator shall appoint a person in the taxable territory for the purpose of paying service tax and such person shall be liable for paying service tax.”
The intention to bring the category mentioned above under the tax net stems from the fact that there are a few web-based service providers, offering services such as taxi bookings, hotel bookings, etc. without being present in India/being present through a representative. Such web-based providers do not pay service tax on any activity undertaken in India on grounds that either the service provider who actually provides the service to the customer is liable to pay it or the service itself is exempt. Furthermore, in other such cases, service providers with a presence in India do not pay service tax as it is charged by the actual service provider. The issue here could be that though such service providers could have charged service tax, it may not have been deposited on a timely basis. It is difficult to get a hold of such service providers because they are unorganised and do not have a fixed place of operations such as cab service providers.
The term “aggregator” implies that there should be a web-based software application and a communication device to connect potential customers with the service providers to provide services under the brand name/trade name of the person owning the software application. In other words, the intention appears to cover transactions in which service providers service their customers while being connected through communication devices to a person who owns and manages a web-based software application.
When the amounts get credited directly into account of the aggregator such as Uber/Ola/Make my trip, it is liable as a service provider on its own account. It is also liable on the commission receipts from the operator. When the operator collects charges from passengers directly working under aggregator’s brand name, ST liability arises under reverse charge on the aggregator.
However, there are businesses that connect service providers with prospective customers through web-based applications for services like travel, hotels, cabs, etc. The change in the provisions could have an impact on such businesses. To evaluate whether such businesses are covered within the ambit, the following must be considered:
- The arrangement between the service provider and the person owning the web-based software application;
- Whether billing the customer is carried out by the service provider or the owner of the web-based software application;
- If the billing is carried out by the service provider, how is the owner of the web-based software application remunerated – through fixed income or on a commission basis;
- Whether the arrangement between the service provider and the owner of the web-based software application is on a principal-to-principal basis or principal-to-agent basis.
The response to the above will help businesses understand whether they can be regarded as aggregators under service tax and also help them align their structure, if required.
Once a person is identified/regarded as an aggregator, the consideration/value of services on which service tax is to be levied/paid by the aggregator must be evaluated. Currently, the most common service where the aggregator model may be applicable is that of Hotel operators. We analyse the impact of the aggregator model on hiring of Villas in two scenarios in the ensuing paragraphs. The scenarios consider the terms of agreement between the aggregator and the service provider as well as the flow of consideration to/by the aggregator.
Scenario I
In this scenario, the aggregator acts in the capacity of a provider of second homes and raises invoices to the end customer for the room rent or Villa rent(i.e. charge of INR 100). The aggregator appoints contracts various second home for providing services rent to the end customer. In such a situation, the aggregator pays remuneration to the villa owner for the services rendered by him (i.e. INR 70).
Implications under Scenario I
- As the aggregator acts as a Hotel or Villa provider, it is liable to pay service tax on the consideration received from the end customer i.e. INR 100.
- The aggregator may claim abatement, according to Notification No. 26/2012-ST dated 20 June 2012. In our opinion, the aggregator will mainly provide rooms on rent and can thus avail of the abatement benefit under Sr.No.6. However, if the benefit of the abatement is availed by the aggregator under Sr.No.6, the aggregator will be eligible to claim CENVAT credit for any input but not for input services and capital goods. Thus, if the abatement is availed, the aggregator will have to either let go of the CENVAT credit on input services and Capital Goods.
- However, if the aggregator is an individual, Hindu Undivided Family (HUF), partnership firm whether registered or not, including an association of persons, and if the end customer is a body corporate, then in that case the end customer is liable to pay service tax under the reverse charge mechanism.
- In light of the recent amendment in the Finance Bill, 2015, it appears that the aggregator will also be liable to discharge the service tax liability on the second stage of the transaction, in which the aggregator receives services from the cab operator on the value of INR 70.
- In our opinion, if service tax is paid on a reverse-charge basis by the aggregator, CENVAT credit for input services should be admissible to the aggregator, since both the aggregator and the villa owner are engaged in the same line of business i.e. providing villa on rent. However, if the aggregator avails of the benefit of abatement under Sr.No.6 while discharging output liability, the aggregator is not entitled to claim CENVAT credit for the input services and capital goods.
Scenario II
Here, the aggregator provides a web-based platform between the second room owner and the end customer and receives remuneration in the form of commission or a fixed income from the cab operator i.e. INR 10. The second home owner provides room rent to the end customer and charges him INR 100.
Implications under Scenario II
- In this situation, the aggregator receives a commission of INR 15 and would be liable to collect and pay service tax on this amount. However, service tax levied on the commission may become a cost to the Villa Owner if the he cannot avail CENVAT credit on it.
- In the second stage of the transaction, the Villa Owner (an individual or HUF) rents villa to the end customer (an individual or HUF). According to the recent amendment to the term “aggregator”, and interpreting the literal meaning of the “person liable to pay service tax” as an aggregator, it appears that the aggregator is liable to pay service tax on the value of the service i.e. INR 100.
- If the Villa Owner is an individual, HUF or partnership firm whether registered or not, including an association of persons, that render services to end customers who are body corporates, then the end customers would have to pay service tax under the reverse charge mechanism.
- There could be a situation in which both the aggregator and the end customer could be liable to service tax on a particular transaction. In our opinion, this should not be the intention of the law.
- In addition, considering the changes and the intention of the law, businesses must review their existing tax structures and the tax impact as it would affect cash flows, claim of service tax credits, etc. Businesses may also need to restructure and realign structures in order to ensure a simple tax structure.
Conclusion:
1. What is tax implication on Aggregator Model?
i. As the aggregator acts as a Hotel or Villa provider, it is liable to pay service tax on the consideration received from the end customer i.e. INR 100
ii. As the aggregator acts as a Hotel or Villa provider, it is liable to pay service tax on the consideration received from the end customer i.e. INR 100
iii. The aggregator may claim abatement, according to Notification No.26/2012-ST dated 20 June 2012. In our opinion, the aggregator will mainly provide rooms on rent and can thus avail of the abatement benefit under Sr.No.6. However, if the benefit of the abatement is availed by the aggregator under Sr.No.6, the aggregator will be eligible to claim CENVAT credit for any input but not for input services and capital goods. Thus, if the abatement is availed, the aggregator will have to either let go of the CENVAT credit on input services and Capital Goods.
iv. However, if the aggregator is an individual, Hindu Undivided Family (HUF), partnership firm whether registered or not, including an association of persons, and if the end customer is a body corporate, then in that case the end customer is liable to pay service tax under the reverse charge mechanism.
v. In light of the recent amendment in the Finance Bill, 2015, it appears that the aggregator will also be liable to discharge the service tax liability on the second stage of the transaction, in which the aggregator receives services from the cab operator on the value of INR 70.
vi. In our opinion, if service tax is paid on a reverse-charge basis by the aggregator, CENVAT credit for input services should be admissible to the aggregator, since both the aggregator and the villa owner are engaged in the same line of business i.e. providing villa on rent. However, if the aggregator avails of the benefit of abatement under Sr.No.6 while discharging output liability, the aggregator is not entitled to claim CENVAT credit for the input services and capital goods.
2. In aggregator model whether invoice has to be raised on customer by aggregator or by service providers who provide services under brand name of aggregator? Who should receive payment from the customer?
1. Aggregator would pay the ST on the gross amount billed towards branded services provided under aggregator brand name by service providers.
2. The invoice could be raised by the service provider providing branded services to end customer. The payment from customer could be received by service provider from the customer. Alternately Aggregator also could receive payment for the service provided under brand name of the service provider
3. Issue: How to disclose the transactions in ST-3 returns of Aggregator and branded service provider?
i. The service tax liability is to be disclosed by aggregator in the ST-3 returns by Aggregator under service receiver portion of ST payable sheet, in respective months from March 15 onwards.
ii. The services on which ST liability is paid by aggregator, is to be disclosed by the service provider as part of the value of gross taxable services in service provider portion of the ST-3 Service tax payable sheet.
iii. Then deducted at the row where it specifies any other deductions claimed. Deduct the value of the services on which ST is paid by Aggregator. Mention in the narration-service tax liability paid by aggregator under reverse charge vide notification no.7/2015- ST
4. Normally service tax paid under reverse charge is available as Cenvat credit to receiver of service. Whether aggregator is eligible to avail cenvat credit of service tax paid for aggregator services paid under reverse charge mechanism?
Yes, aggregator could avail the eligible Cenvat credit of ST paid under reverse charge, subject to eligibility of such credit under CCR. The credit could be set off against the output ST liability on taxable services provided by aggregator.
5. How to account revenue in the books of accounts?
i. We feel that one should show room rent or hiring charges as topline. This will avoid the commission income to be booked in accounts on which department may levy tax litigating it to be different service. The expense of aggregator will be agreed rent to be provided to second home owners. While drafting agreement with second home owners aggregator should not use word commission and should only say that commercials are based on Villa rate per day or room rent per day.
ii. Even when it is providing on MG or revenue shares commercials should be on per day basis. This will avoid litigation as any stage and would help establish the fact that aggregator is in business of providing services of second home on rent.
Disclaimer:
The Views Expressed in the article is personal opinion of author. The author is CA and CS by profession and one can reach him on @hemanshow79 on twitter or mail queries on [email protected]. The article can be said as reference material. However courts can take different opinion based on nature and circumstances of each case.
