Guidance Note 7 – Rules of Interpretation

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. These are explained in paras below –

7.1 Principles for interpretation of specified descriptions of services

Although the negative list approach largely obviates the need for descriptions of services, such descriptions continue to exist in the following areas –

•  In the negative list of services.
•  In the declared list of services.
•  In exemption notifications.
•  In the Place of Provision of Service Rules, 2012
•  In few other rules and notifications.

There are two principles laid down which are contained in clauses (1) and (2) of section 66F of the Act.

7.1.1 What is the scope of the clause (1) of section 66F: ‘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 few illustrations which are given below –

• · ‘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.
• · 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.

7.1.2 What is the scope of clause (1) of section 66F: ‘where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description’.

This rule can also be best understood with few illustrations which are given below –

•  The services provided by a real estate agent are in the nature of intermediary services relating to immovable property. As per the proposed 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 services provided by an intermediary the place of provision of service is where the intermediary is located. Since Rule 5 of the draft ‘Place of Provision of Services Rules, 2012’ provides a specific description of ‘estate agent’, the same shall prevail.
•  Pandal and Shamiana is an existing service and will remain a subject of taxation. Likewise service provided by way of catering is a taxable service and entitled to abatement. There is abatement when the two are provided in combination. Since the combination is more a specific entry than the two provided individually, there is no need to apply the later rule of bundled services, where the character could be judged by the service which provides it the essential character.

7.2 Taxability of ‘bundled services’.

‘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.

Two rules have been prescribed for determining the taxability of such services in clause (3) of section 66F of the Act. These rules, which are explained below, are subject to the provisions of the rule contained in sub section (2) of section 66F, viz a specific description will be preferred over a general description as explained in para 7.1.2 above.

7.2.1 Services which are naturally bundled in the ordinary course of business

The rule is – ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’

Illustrations -

•  A 5-star hotel in Gurgaon (Haryana) provides a 4-D/3-N package with the facility breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.

7.2.2 Services which are not naturally bundled in the ordinary course of business

The rule is – ‘If various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall be treated as provision of a service which attracts the highest amount of service tax.’

Illustrations -

•  A house is given on rent one floor of which is to be used as residence and the other for housing a printing press. Such renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore, if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of service tax. In this case renting for use as residence is a negative list service while renting for non-residence use is chargeable to tax. Since the latter category attracts highest liability of service tax amongst the two services bundled together, the entire bundle would be treated as renting of commercial property.

7.2.3 Significance of the condition that the rule relating to ‘bundled service’ is subject to the provisions of sub-section (2) of section 66F.

Sub-section (2) of section 66 lays down : ‘where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description’ (refer para 7.1.2 above). This rule predominates over the rule laid down in sub-section (3) relating to ‘bundled services’. In other words, if a bundled service falls under a service specified by way of a description then such service would be covered by the description so specified. The illustration, relating to a bundled service wherein a pandal and shamiana is provided in combination with catering service, given in the second bullet in para 7.1.2 above explains the operation of this rule.

7.2.4 Manner of determining if the services are bundled in the ordinary course of business

Whether services are bundled in the ordinary course 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 few of which are listed below –

•  The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package then such a package could be treated as naturally bundled in the ordinary course of business.
•  Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
•  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 service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
•  Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business are -
•  There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
•  The elements are normally advertised as a package.
•  The different elements are not available separately.
•  The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.

No straight jacket formula can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors some of which are outlined above.

7.2.5 Manner of determination of taxability ‘composite transactions’ wherein an element of provision of service is combined with an element of sale of goods

Please refer to point no 2.5.3 of this Guidance Note.

Interpretation of service descriptions: specific descriptions and natural bundling rules determine tax character of composite supplies. Section 66F prescribes that ancillary services used to provide a main service are excluded from a main-service description and that the most specific service description overrides general descriptions. For bundled services, if elements are naturally bundled the bundle is a single service defined by its essential character; if not naturally bundled, the bundle is treated as the service attracting the highest tax. Determination of natural bundling depends on indicators such as consumer expectation, market practice, ancillary character, single pricing, advertising, separate availability, and integration.