TaxTMI 
TaxTMI 
TaxTMI 
What is Service?
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.... bulleted above have been explained in the points below. 2.1 Activity 2.1.1 What does the word 'activity' signify? 'Activity' has not been defined in the Act. In terms of the common understanding of the word activity would include an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility etc. It is a term with very wide connotation. Activity could be active or passive and would also include forbearance to act. Agreeing to an obligation to refrain from an act or to tolerate an act or a situation has been specifically listed as a declared service under section 66E of the Act. 2.2 Consideration 2.2.1 The phrase 'consideration' has not been defined in the Act. What is, therefore, the meaning of 'consideration'? As per Explanation (a) to section 67 of the Act "consideration" includes any amount that is payable for the taxable services provided or to be provided. Since this definition is inclusive it will not be out of place to refer to the definition of 'consideration' as given in section 2 (d) of the Indian Contract Act, 1872 as follows- "When, at the desire of the promis....
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.... an act or a situation in return for provision of a service ♦ Doing or agreeing to do an act in return for provision of service Illustrations If……… And in return... A agrees to dry clean B's clothes B agrees to click A's photograph A agrees not to open dry clean shop in B's neighborhood B agrees not to open photography shop in A's neighborhood A agrees to design B's house B agrees not to object to construction of A's house in his neighborhood A agrees to construct 3 flats for B on land owned by B B agrees to provide one flat to A without any monetary consideration Then For the services provided by A to B, the acts of B specified in 2nd column are non- monetary consideration provided by B to A. Conversely, for services provided by B to A, similar reasoning will be adopted. 2.2.5 Is the value of non-monetary consideration important? Yes. The non-monetary consideration also needs to be valued for determining the tax payable on the taxable service since service tax is levied on the value of consideration received which includes both monetary consideration and money value of non-monetary consideration. 2.2.6 How is the....
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....ism information, access to free channels on TV and a large number of governmental activities for citizens are some of the examples of activities without consideration. Similarly there could be cases of payments without an activity though they cannot be put in words as being "consideration without an activity". Consideration itself pre-supposes a certain level of reciprocity. Thus grant of pocket money, a gift or reward (which has not been given in terms of reciprocity), amount paid as alimony for divorce would be examples in this category. However a reward given for an activity performed explicitly on the understanding that the winner will receive the specified amount in reciprocity for a service to be rendered by the winner would be a consideration for such service. Thus amount paid in cases where people at large are invited to contribute to open software development (e.g. Linux) and getting an amount if their contribution is finally accepted will be examples of activities for consideration. 2.3.1 Would imposition of a fine or a penalty for violation of a provision of law be a consideration for the activity of breaking the law making such activity a 'service'? ....
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....ent made as a result of a mistake If returned it is not consideration If not returned and retained by the service provider it becomes a part of the taxable value. 8. Demurrages payable for use of services beyond the period initially agreed upon e.g. retention of containers beyond the normal period. This will be consideration and is covered by clause (x) of sub -rule (1) to Rule 6 of the Valuation Rules. 2.3.3 Can a consideration for service be paid by a person other than the person receiving the benefit of the service? Yes. 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. For example, holding company may pay for services that are provided to its associated companies. 2.4 By a person for another 2.4.1 What is the significance of the phrase '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. Example of such service would include a service provided by one branch of a company to another o....
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.... Are Government and local authorities also liable to pay tax? Yes. However, most of the services provided by the Government or local authorities are in the negative list. 2.4.6 What is the rationale behind taxing certain activities of the Government or local authorities? Only those activities of Government or local authorities are taxed where similar or substitutable services are provided by private entities. The rationale is as follows- ♦ 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. 2.4.7 What is the meaning of 'Government'? The phrase 'Government' has not been defined in the Act. As per clause (23) of section 3 of the General Clauses Act, 1897 'Government' includes both Central Government and any State Government. As per clause (8) of section 3 of the said Act 'Central Government', in relation to anything done or to be done after the commencement of the Constitution, mean the President. A....
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....specific as explained in point no 2.4.8 above and only those bodies which fall in the definition comprise 'local authorities'. It would not include other bodies which are merely described as a local body by virtue of a local law. However it may be noted that services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243W of the Constitution are specifically exempt under the mega exemption. 'Governmental authority' has been defined in the said mega exemption as a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution. Thus some of these local bodies may comprise governmental authorities. 2.4.10 Would various entities like a statutory body, corporation or an authority constituted under an Act passed by the Parliament or any of the State Legislatures be 'Government' or "local authority"? A statutory body, corporation or an authority created by the Parliamen....
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....ices provided by the Government or local authorities are taxable only to the extent they are not covered elsewhere i.e. either in the negative list or in the exemptions. 2.5 Activities specified in the declared list are services. 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. For guidance on the declared services please refer to Guidance Note 6. 2.6 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 ....
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....d 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 judgment has been explained in detail in point no 2.6.3. Although the judgment was given in the context of composite transactions involving an element of transfer in title of goods by way of sale and an element of provision of service, the ratio would equally apply to other kind of composite transactions involving a provision of service and transfer in title in immovable property or actionable claim. 2.6.3 What is the manner of dealing with composite transactions which in addition to a transfer of title in goods involve an element of provision of service? The manner of treatment of such composite transactions for the purpose of taxation, i.e. are they to be treated as sale of goods or....
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....tance 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- ♦ Except in cases of works contracts or catering contracts [exact words in article 366(29A) being - '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'] composite transactions cannot be split into contracts of sale and contracts of service. ♦ 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. ♦ The nature of a composite transaction, except in case of two exceptions carved out by the Constitution, 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 goo....
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.... the sale a distinct and a separate transaction then the activity of sale of such goods gets excluded from the definition of service itself. The essence and intent of notification no 12/2003 has, therefore, been fully captured in the definition of service itself. 2.6.5 Will the goods portion in transactions like annual maintenance contracts or erection and commissioning or construction be includible in the value of services consequent to the deletion of Notification 12/2003-ST? All the examples given in the question now comprise "works contracts" and only the service portion of such contracts comprise service. By the express provisions contained in the definition of service (which is mandated by constitutional provisions) it is not possible to tax the goods portion of works contracts. However the principles of segregation of the value of goods are provided in Rule 2A of the Valuation Rules. Thus there is no basis for the taxation of goods in such contracts even after the deletion of the stated notification. Even for the sale of any equipment for which a separate contract for warranty or after sales services or maintenance is entered the discernible sales portion is not....
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....the nature of transfer of title in securities (for example a person agreeing not to exercise his right in a security for a given period of time for a consideration) would not be included in this exclusion clause to the definition of 'service. 2.6.8 What is a derivative? As per in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1956 (42 of 1956) "derivative" includes-- (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities. The definition of 'derivatives' in the said Act is an inclusive definition. Moreover, it may be noticed that as per the said definition 'derivative' includes security derived from a 'contract of difference' which is of a very wide ambit. It would thus be prudent to keep in mind definition of derivatives as contained in Clause (a) of Section 45U of the RBI Act, 1935 as per which a 'derivates' means an instrument, to be settled at a future date, whose value is derived from change in in....
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....ich is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution. 2.7.1 What are 'deemed sales' defined in article 366(29A)? The six categories of deemed sales as defined in article 366(29A) of the Constitution are - ♦ transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration ♦ transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract ♦ delivery of goods on hire-purchase or any system of payment by instalments ♦ 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 ♦ supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration ♦ 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 pa....
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....n 66E do not encroach upon the area of deemed sales. In fact most of the declared services have been specified with the intent of clarifying the distinction between deemed sales and activities related thereto which are outside the realm of deemed sales but qualify as a service. 2.8 Transactions only in money or actionable claims do not constitute service 2.8.1 What kind of activities would come under 'transaction only in money'? ♦ The principal amount of deposits in or withdrawals from a bank account. ♦ Advancing or repayment of principal sum on loan to someone. ♦ Conversion of ₹ 1,000 currency note into one rupee coins to the extent amount is received in money form. 2.8.2 Would a business chit fund comes under 'transaction only in money'? In business chit fund since certain commission received from members is retained by the promoters as consideration for providing services in relation to the chit fund it is not a transaction only in money. The consideration received for such services is therefore chargeable to service tax. 2.8.3 Would the making of a draft or a pay order by a bank be a transaction only in money? No. Since the ba....
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....ne currency for another also charges a commission (often inbuilt in the difference between the purchase price and selling price of forex). The activity of exchange of currency, per-se, would be a transaction only in money, the related activity of providing the services of conversion of forex, documentation and other services for which a commission is charged separately would be very much a 'service'. 2.8.6 Would debt collection services or credit control services be considered to be transaction only in money? No. Such services provided for consideration are taxable. 2.8.7 What are actionable claims? As per section 3 of the Transfer of Property Act, 1893 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. Illustrations of actionable claims are - ♦ Unsecured debts ♦ Right to partic....
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.... satellite TV broadcasts, DTH broadcasts etc be 'actionable claims? No. Such recharge vouchers do not create a 'beneficial interest' in a moveable property but only enable a person to enjoy a particular service. 2.9 Provision of service by an employee to the employer is outside the ambit of service 2.9.1 Are all services provided by an employer to the employee outside the ambit of services? No. 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 an employee provides his services on contract basis to an associate company of the employer, then this would be treated as provision of service. 2.9.2 Would services provided on contract basis by a person to another be treated as services in the course of employment? No. Services provided on contract basis i.e. principal-to-principal basis are not services provided in the course of employment. 2.9.3 Would amounts received by an employee from the employer on premature termination of contract of employment be chargeable to service tax? No. Such amou....