Basically what the provisions of service tax contained in finance act 1994 lack was the definition of service.
What the service actually is?
Answer to this question has also became important because now all the services are being taxable except those which has been provided in negative list or are being specifically exempted by way of exemption notification. Thus it is necessary to capture that universe such that it does not
– infringe upon either the powers to tax of another legislature in specific area or
– taxes such area as are subjected to like taxes as goods.
This basic question, about definition of services, was before Finance 2012 was not discussed anywhere, and thus basic rule followed was “If it is not taxable as sales is taxable as services.”
The same was indirectly approved by Hon’ble SC in case of Martin Lottery Agent-2009, where it was expressed that parliament is entitled to create legal fiction/ deeming provision.
Finance Act 2012, with the introduction of negative list has also come up with the definition of “Services”. The definition of Services is contained in clause (44) of sec65B, introduced by Finance Act 2012, reads as follow (bare text):
“Any activity carried out by a person for another for consideration, and includes declared services, but shall not include
A. an activity which constitute merely,-
i. a transfer of title in goods or immovable property, by way of sale, gift or in other manner; or
ii. such transfer, delivery or supply of any good which is deemed to be sale within the meaning if clause (29A) of article 366 of the constitution; or
iii. a transition in money or actionable claim;
b. a provision of services by an employee to the employer in the course of or in relation to his employment;
c. fees taken in any court or tribunal established under any law for the time being in force.”
There are three explanations appended to the definition of ‘service’ as aforesaid given which are dealt with in later part of this write-up.
Now if we read the basic definition in parts, it says:
– any activity
Now again what do we mean by term “activity” is nowhere defined in Finance Act 2012, and thus has to be understood as common understanding, which has a very wide meaning.
– carried out by a person for another
The phrase ‘provided by one person to another’ signifies that services provided by a person to self are outside the ambit of taxable service. What do act mean by person has been this time defined by act in clause (37) of sec 65B, in an inclusive manner, which states that “person” includes
– for consideration
Again the definition lacks here because what do we mean by consideration has not been defined, and thus definition of consideration as assigned to it in Indian
Contract Act can be used here. Now the point is whether consideration paid by person other than the person receiving the benefit of the service will be chargeable to tax or not and whether the consideration paid will include monetary consideration only or non monetary consideration also?
The answer to both the question is yes, i.e. The consideration for a service may be provided by a person other than the person receiving the benefit of service as long as there is a link between the provision of service and the consideration and the same shall be chargeable to tax & consideration shall include both monetary as well as non monetary consideration. However, the value of non-monetary consideration is determined as per section 67 of the Act and the Service Tax (Determination of Value) Rules 2006.
– and includes a declared service.
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.
The said definition further provides that ‘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.
– any transfer which is a deemed sale within the meaning of clause (29A) of article 366 of the constitution.
‘Transfer of title’ means change in ownership. Mere transfer of custody or possession over goods or immovable property where ownership is not transferred does not amount to transfer of title and ere 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.
Previously in case of composite transaction involving sales and service, service part of transaction was taxable as per notification no. 12/2003. But now under the negative list scheme, transactions that involve transfer of title in goods are excluded. Therefore if goods are being sold by a service provider under a distinct and a separate contract then sale of such goods is excluded from the definition of service. Such sale shall also include deemed sale within the meaning of clause (29A) of article 366 of the constitution. If it is a ‘composite contract’ manner of treatment of such transactions for the purpose of taxation, i.e. are they to be treated as sale of goods or provision of service, has been laid down by the Honorable Supreme Court in the case of Bharat Sanchar Nigam Limited vs. Union of India [2006(2)STR161(SC)].
The nature of a composite transaction would be determined by the element which determines the ‘dominant nature’ of the transaction.
In view to comply with the above notification 12/2003-ST has also been proposed to be deleted.
However, in case of works contracts and ‘service 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 service’ the ‘dominant nature test’ does not apply and service portion is taxable as a ‘service’ This has also been declared as a service under section 66E of the Act.
– a transaction only in (iii) money or (iv) actionable claim.
This exclusion cover two different types of activity i.e. transaction in money and actionable claim. Activities like Deposits in or withdrawals from a bank account, Advancement or repayment of principal sum on loan to someone, Conversion of Rs 1,000 currency note into one rupee coins to the extent amount is received in money form etc are included in ‘transaction in money’. Scope of taxation of such activities has been defined by explanation 2, according to which transaction in money shall not include any activity for which a separate consideration is charged.
Thus activities like business of chit fund, making of draft or pay order, debt collection service being performed for consideration are chargeable to service tax and does not come under ‘transaction in money’.
Actionable claim shall mean to what has been defined as per section 3 of the Transfer of Property Act, 1893 i.e. 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. Illustrations of actionable claims are – Unsecured debts, Right to participate in the draw to be held in a lottery etc. A transaction only in such actionable claim is outside the ambit of service.
– any service provided by an employee to an employer in the course of the employment.
This exclusion does not mean all services provided by employee are excluded from meaning of services, only services that are provided by the employee to the employer in the course of employment are outside the ambit of services. Services provided outside ambit of employment for a consideration would be a service. For example, if a person engaged by the employer in private capacity and beyond the demands of employment will be taxable.
Now comes the explanation part, carved out by Finance Act 2012 to definition.
a) Explanation 1 clarifies that ‘service’ does not cover functions or duties performed by Members of Parliament, State Legislatures, Panchayat, Municipalities or any other local authority, any person who holds any post in pursuance of the provisions of the Constitution or any person as a Chairperson or a Member or a Director in a body established by the Central or State Governments or local authority and who is not deemed as an employee.
b) Explanation 3 creates two exceptions, by way of a deeming provision, to the general rule that only services provided by a person to another are taxable. As per these deeming provisions establishment of a person located in taxable territory and establishment of such person located in non-taxable territory are deemed to be establishments of distinct persons. Further an unincorporated association or body of persons and members thereof are also deemed as separate persons.
– fees payable to a court or a tribunal set up under a law for the time being in force.
Compiled by –
Deepak Aggarwal –
Email – [email protected]