Definition of Service - A Detailed Analysis

A clear understanding of the definition is of utmost importance, because this defines the scope of taxability. Since it is the regime of negative list anything and everything is coming under the ambit of service tax net except those exempted under the Mega Exemptions and Negative List. Therefore a clear analysis on the definition of service will throw some light on it.


A Pictorial representation

The definition of service consists of three part (1) Inclusive part (2) Exclusive part and (3 ) Explanation part.

'Service' has been defined in Section 65B clause (44)

  1.  any activity

  2.  for consideration

  3.  carried out by a person for another

  4.  and includes a declared service.

The said definition further provides that 'Service' does not include -

  1.  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

  2.  (iii) a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution(  Items)   

  3.   a transaction only in (iv) money or (v) actionable claim

  4.  a service provided by an employee to an employer in the course of the employment.

  5.  fees payable to a court or a tribunal set up under a law for the time being in force.

Explanations:

1. Explanation 1  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.

  2. Explanation 2  Transaction in money does not include any activity in relation to money by way of its use or conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged.'

  3. 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.

  4.Explanation 4 explains that a branch or an agency of a person through which the person carries out business is also an establishment of such person.

A.Analysis of the Inclusive Part of the definition:

Inclusive part 1: Any Activity

'Activity' has not been defined in the Act.

a. 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.

b. Activity could be active or passive and would also include forbearance to act.

c. Agreeing to an obligation to refrain from an act or to tolerate an act o

d. A situation has been specifically listed as a declared service under section 66E of the Act.

Inclusive part 2: Consideration

a. 'Consideration' has not been defined in the Act.

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.

In simple terms,

 'consideration' means everything received or recoverable in return for a provision of service which includes monetary payment and any consideration of non- monetary nature or deferred consideration as well as recharges between establishments located in a non-taxable territory on one hand and taxable territory on the other hand.

b. Implications of the condition that activity should be carried out for a 'consideration'

        To be taxable an activity should be carried out by a person for a 'consideration'

       Some Cases:

       1. Activity carried out without any consideration like donations, gifts or free charities are therefore outside the ambit of service.

       2.However in case research grant is given with counter obligation on the researcher to provide IPR rights on the outcome of research or activity undertaken with the help of such grants then the grant is a consideration for the provision of service of research.

       2. Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service.

       3.Donations to a charitable organization are not consideration unless charity is obligated to provide something in return (e.g. display or advertise the name of the donor in a specified manner or such that it gives a desired advantage to the donor)

       4. An activity by a charity for a consideration would be a service and taxable unless otherwise exempted.

   

c. Meaning of monetary consideration

Monetary consideration means any consideration received in the form of money.

'Money' has been defined in section 65B

includes not only cash but also cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler's cheque, money order, postal or electronic remittance or any such similar instrument.

d. Non-monetary consideration

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.

Value of non-monetary consideration determined

Determined as per section 67 of the Act and the Service Tax (Determination of Value) Rules 2006,

 which is equivalent money value of such consideration and if not ascertainable, then as follows:-

  1. On the basis of gross amount charged for similar service provided to other person in the ordinary course of trade;

  2. Where value cannot be so determined, the equivalent money value of such consideration, not less than the cost of provision of service.

Non-monetary consideration essentially means compensation in kind such as the following:

  a.  Supply of goods and services in return for provision of service

  b.  Refraining or forbearing to do an act in return for provision of service

  c.  Tolerating an act or a situation in return for provision of a service

  d.  Doing or agreeing to do an act in return for provision of service

e. Activity for a consideration

The concept 'activity for a consideration' involves

an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration.

An activity done without such a relationship i.e. without the express or implied contractual reciprocity of a consideration would not be an 'activity for consideration' even though such an activity may lead to accrual of gains to the person carrying out the activity.

Case:

1. An award received in consideration for contribution over a life time or even a singular achievement carried out independently or without reciprocity to the amount to be received will not comprise an activity for consideration.

2. An artist performing on a street does an activity without consideration even though passersby may drop some coins in his bowl kept after feeling either rejoiced or merely out of compassion. They are, however, under no obligation to pay any amount for listening to him nor have they engaged him for his services.

3.On the other hand if the same person is called to perform on payment of an amount of money then the performance becomes an activity for a consideration.

f. 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. (Eg, holding company may pay for services that are provided to its associated companies.)

Inclusive part 3: By a person for another

1. 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 or to its head office or vice-versa.)

2. Situations where services provided by a person to oneself are taxable

As per Explanation 2 of clause (44) of section 65B,

  a.  an establishment of a person located in taxable territory and another establishment of such person located in non-taxable territory are treated as establishments of distinct persons.

  b. an unincorporated association or body of persons and members thereof are also treated as distinct persons

 (i.e, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multi-national company located outside India would be taxable provided other conditions relating to taxability of service are satisfied).

3 In case of JVs , AOPs the services provided, both by JV/AOP as well as by each of the individual persons constituting the JV/AOP will be liable to be taxed separately,

However credit of the tax paid by independent persons to the JV/AOP and as otherwise admissible under Cenvat Rules.

4 'Person' has been defined Section 65 B of the Act. The following shall be considered as persons for the purposes of the Act:

  a.  an individual

  b.  a Hindu undivided family

  c.  a company

  d.  a society

  e.  a limited liability partnership

  f.  a firm

  g. an association or body of individuals, whether incorporated or not

     h. Government (However, most of the services provided by the Government or local authorities are in the negative list.)

  i. a local authority, or

  j.  every artificial juridical person, not falling within any of the preceding sub-clauses.

5. Rationale behind taxing certain activities of the Government or local authorities

  a.  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

  b. to avoid break in Cenvat chain as the support services provided by Government are normally in the nature of intermediary services.

6. Local authority is defined in clause (31) of section 65B and means the following:-

  a. A Panchayat as referred to in clause (d) of article 243 of the Constitution

  b. A Municipality as referred to in clause (e) of article 243P of the Constitution

  c. A Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund

  d. A Cantonment Board as defined in section 3 of the Cantonments Act, 2006

  e. A regional council or a district council constituted under the Sixth Schedule to the Constitution

  f. A development board constituted under article 371 of the Constitution, or

  g. A regional council constituted under article 371A of the Constitution.

7. All local bodies constituted by a State or Central Law are not local authorities, only those defined as local bodies.

8. 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 is separate from the state and cannot be regarded as Central or State Government and also do not fall in the definition of 'local authority'.

9. Services are provided by one department of the Central Government to another department of the Central Government or by a department of a State Government to another department of the same State Government then such service would not be taxable as it would amount to self-service.

10.On the other hand if a service is provided by a Central Government department to a State Government department or vice versa or a by a State to another State Government or by a Government to an autonomous body, the same would be taxable if such service does not fall in the negative list.

 Inclusive part 4: Declared 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.

B. Analysis of the Exclusive Part of the definition:

Exclusive part 1: 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

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 shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

1. 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. (For example giving the property on rent or goods for use on hire would not involve a transfer of title.)

2. Significance of the word 'only' in the exclusion clause above

The word 'only' signifies that activities which constitute only:

  a.  transfer of title in goods or immovable property; or

  b.  transfer, supply or delivery which is deemed to be a deemed sale of goods or constitute; or

  c.  a transaction in money or an actionable claim-are outside the definition of service.

Thus a transaction which in addition to a transfer of title in goods or immovable property, which involves an element of another activity carried out or to be carried out by the person transferring the title would not out rightly be excluded from the definition of service. Such transactions are liable to be treated as follows-

Cases 1:

       a. A builder carrying out an activity for a client wherein a flat is constructed by the builder for the client for which payments are received in installments and on completion of the construction the title in the flat is transferred to the client.

       b. This involves two elements namely provision of construction service and transfer of title in immovable property. The two activities are discernibly separate.

       c. The activity of construction carried out by the builder would, therefore, be a service and the activity of transfer of title in the flat would be outside the ambit of service.

Cases 2:

  a.  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 following principles emerge from the said judgment for ascertaining the taxability of composite transactions-

  1.  Except in cases of works contracts or catering contracts composite transactions cannot be split into contracts of sale and contracts of service.

  2.  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.

  3.  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.

   a.  If the dominant nature of such a transaction is sale of goods or immovable property then such transaction would be treated as such.

   b.  If the dominant nature of such a transaction is provision of a service then such transaction would be treated as a service and taxed as such even if the transaction involves an element of sale of goods.

  4.  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

  5.  If the transaction represents two distinct and separate contracts and is discernible as such then contract of service in such transaction would be segregated and chargeable to service tax if other elements of taxability are present. This would apply even if a single invoice is issued.

The principles explained above would, mutatis mutandis, apply to composite transactions involving an element of transfer of title in immovable property or transaction in money or an actionable claim.

3.Goods portion in transactions like annual maintenance contracts or erection and commissioning or construction will be excluded from  in the value of services. These are in the nature of work contracts.

The principles of segregation of the value of goods is applicable as  provided in Rule 2A of the Valuation Rules.

4.Since securities are included in the definition of goods activities that are in the nature of only transfer of title by way of sale, redemption, purchase or acquisition of securities on principal-to-principal basis, excluding services of dealers, brokers or agents in relation to such transactions, are outside the ambit of 'services. However activities which are not in 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) shall be included in the definition of 'service.

a. Selling of mutual funds or debentures would not be a service as the same would be a transaction in securities. However Service tax would be chargeable on the 'entry and exit load' amount charged by a mutual fund to the investor

b. Service tax would also be leviable on fund management activity undertaken by an asset management company (AMC) for which an AMC charges the mutual fund an 'investment and advisory fee', in accordance with provisions contained in the SEBI regulation.

Exclusive part 2 : Activity to be taxable should not constitute merely a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution.

a. 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 -

  1.  transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration

  2.  transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract

  3.  delivery of goods on hire-purchase or any system of payment by installments

  4.  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

  5.  supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration

  6.  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 payment or other valuable consideration.

(Some categories of deemed sales do not involve transfer of title in goods like transfer of goods on hire-purchase or transfer of right to use goods. Accordingly, deemed sales have been specifically excluded. Declared services in section 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.)

Exclusive part 3 :Transactions only in money or actionable claims do not constitute service

a. Illustrations for 'transaction only in money'

  1.  The principal amount of deposits in or withdrawals from a bank account.

  2.  Advancing or repayment of principal sum on loan to someone.

  3.  Conversion of Rs 1,000 currency note into one rupee coins to the extent amount is received in money form.

b. 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.

c. The bank charges as commission for preparation of a bank draft or a pay order it is not a transaction only in money. The money received for the face value of such instrument would not be consideration for a service since to the extent of face value of the instrument it is only a transaction in money.

d Investment of funds by a person with another for which the return on such investment is returned or repatriated to the investors without retaining any portion of the return on such investment of funds is a transaction only in money. Thus a partner being admitted in a partnership against his share will be a transaction in money. Also, if a service is received in lieu of an investment it would cease to be a transaction only in money to the extent the investment represents the consideration for the service received.

e. 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.

a. Illustrations of actionable claims are -

  1.  Unsecured debts

  2.  Right to participate in the draw to be held in a lottery.

b. Scope of 'beneficial interest in moveable property' in the definition of actionable claim

Beneficial interest in moveable property' is a right or expectancy in a moveable property like right to receive income accruing from a moveable property. Accrual of income from a moveable property could be in the nature of a consideration for a taxable service, e.g. a hiring fees or a license fee accruing on hiring or licensing of a moveable property. In such a situation the service being provided in relation to such moveable property would not be covered in the exclusion clause. It is only if the beneficial interest in such property is transferred to another person for a consideration that the activity of transferring the beneficial interest would be covered.

c. Provision of service by an employee to the employer is outside the ambit of service

1. 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. Services provided on contract basis i.e. principal-to-principal basis are not services provided in the course of employment.

3. Amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would not be chargeable to service tax. However any amount paid for not joining a competing business would be liable to be taxed being paid for providing the service of forbearance to act.

C. Analysis of the Explanation Part of the 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 2: clarifies that transaction in money does not include any activity in relation to money by way of its use or conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged.

      

            1. The implications of this explanation are that while mere transactions in money are outside the ambit of service, any activity related to a transaction in money by way of its use or conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination would not be treated as a transaction in money if a separate consideration is charged for such an activity.

            2.While the transaction in money, per-se, would be outside the ambit of service the related activity, for which a separate consideration is charged, would not be treated as a transaction of money and would be chargeable to service tax if other elements of taxability are present.

            3.For example a foreign exchange dealer while exchanging one 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.'

 c.  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

       (1) 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.

       (2) An unincorporated association or body of persons and members thereof are also deemed as separate persons.

            Implications of these deeming provisions are that inter-se provision of services between such persons, deemed to be separate persons, would be taxable. For example, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multi-national company located outside India would be taxable provided other conditions relating to taxability of service are satisfied.

  d.  Explanation 4 explains that a branch or an agency of a person through which the person carries out business is also an establishment of such person.