Interpretation of description of service
Earlier 117 service heads under section 65(105) of Finance Act, 1994 are gone w.e.f. 1-7-2012. Hence now there is need for classification of service. However interpretation of specific description of services is required as description of service is used at various places.
1 Need for interpretation of description
¨ Description of service used at various places like- (a) Negative list of services (b) Declared list of services (c) Services exempted by a notification (d) Place of Provision of Service Rules to determine where the service is provided (e) Service Tax Rules (f) Cenvat Credit Rules (g) Service Tax Valuation Rules etc.
¨ In some cases, a composite service may consist of two or more different services, termed as ‘bundled services’.
¨ In such case, it is necessary to determine whether a particular service corresponds to a specified head
2 Reference to main service does not include auxiliary service [section 66F(1)]
¨ Reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service.
3 Specific description prevails [section 66F(2)]
¨ Specific description prevails over general description.
¨ This will be so even in case of ‘bundled service’
¨ If hotel provides convention facilities with food, it will be ‘convention service’ and not ‘mandap service’ or ‘catering service’.
4 Composite Service – Bundled Services
¨ Turnkey project, package tour, boarding schools are examples of naturally bundled services.
¨ In case of naturally Bundled service – description to be accepted is on basis of essential character is relevant [section 66F(3)(a)]
¨ For example, in case of educational institute providing boarding arrangements, the essential character of service is education.
5 Naturally Bundled Services
¨ Airlines providing food, video facility. The essential character is air transport of passengers.
¨ Service provider of Air transport of goods providing door delivery by road is still air transport of goods service as that is the essential character of service.
¨ Educational Institution providing Boarding Facilities
¨ Hotel providing convention plus food facilities. The essential character is convention service. Provision of food is incidental.
¨ Renting of commercial property coupled with charges for security, cleaning, air conditioning etc. This is naturally bundled service and should be termed in totality as renting of commercial property.
¨ Services of freight forwarder – essentially transport of goods – other services incidental
6 Services not naturally bundled
¨ If services are not naturally bundled – then description as single service which results in highest liability of service tax will be adopted as description of that service.
¨ For example – property given on rent for residential cum commercial purposes – Residential – 60% and commercial – 40% area. It is not naturally bundled – then highest liability of service tax is when renting for commercial purposes (as service tax liability is Nil in case of residential property). Hence, entire renting will be termed as renting for commercial purposes.
¨ A Chartered Accountant or Management Consultant taking flat on rent, out of which he is using one room for office purposes. This is naturally bundled service and will have to be classified as renting for residential purposes.
¨ Trade understanding relevant.
7 Pure agent vis-à-vis ‘Bundled Service’
¨ Distinction between ‘bundled service’ and service as ‘pure agent’ – Bundled service means all expenses incurred or sub-services provided are part of main service, while in case of ‘pure agent’, the expenses incurred are not part of the service.
¨ The service provider collects various amounts from customer which are not part of his value of services. For example, air travel agent collecting value of ticket in addition to his commission. This is termed as collection as ‘Pure Agent’ and then its amount is not included in value of his taxable service.
¨ CHA arranging for internal transport, storage, loading/unloading/ stevedoring, crane charges etc. These are not part of his services. However, in most of the cases, he adds his mark up and then recover these amounts from customer. In that case, such collection is not as ‘pure agent’. In such case, a view is possible that all such services arranged by CHA are part of ‘naturally bundled service’ and CHA may be held liable to pay service tax on entire amount collected by him from customer (except the statutory charges paid by him on behalf of the customer).