TAX ON SERVICES BUT WHAT IS SERVICE ?

[Dr. Sanjiv Agarwal]

Service tax has been levied on services i.e., taxable services as per section 65(105) of the Finance Act, 1994 but the term 'service' has not been defined in Act/Rules or by way of any explanation. What constitutes taxable service is very often a subject matter of dispute. Its literal meaning is an act of helpful activity, rendering of assistance or help. Service is a transformation of the user or user's goods, as a result of the voluntary intervention by the producer of services. It is generally an intangible commodity in the forms of external efforts and excludes sale of goods or property or commodities. It pre-supposes existence of a service provider. For service tax purposes, if there is no taxable service, there is no tax.

What is Service

Service has been defined differently under various laws and dictionaries. Under Income Tax Act, 1961, service means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.

Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking financing, insurance, chit fund, real estate, transport, processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the conveying of news or other information but does not include the rendering of any service free of charge or under a contract of personal service.

Explanation.— For the removal of doubts, it is hereby declared that any dealings in real estate shall be included and shall be deemed always to have been included within the definition of 'service'. [Monopolies and Restrictive Trade Practices Act].

Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking, financing, insurance transport processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service. [Consumer Protection Act, 1986].

Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service fee of charge or under a contract of personal service. [Foreign Exchange Management Act, 1999].

Service means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial matters such as banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, repair, conveying of news or information and advertising. [Trademarks Act, 1999 and Competition Act, 2002].

Service means something provided, usually for a fee, that may not be classed as manufacturing or production in any form (such as legal advice, brokerage, agency services and financial advice). [International Accounting; Business; Insurance].

Thus, literally, service can be said to have the following salient features—

—    Act of helpful activity

—    Act of doing something useful

—    Rendering of assistance/help

—    Anything which does not involve supply or transfer of goods is service

—    Transformation of user/user goods as a result of voluntary intervention of service provider

—    Intangible commodity in form of human effort

—    Excludes sale of goods/commodities/property

—    Existence of service provider

However, following judgements may create controversy between sale of goods and services -

• Sale of sim card and activation of mobile service is a taxable service [Escotel Mobile Communications Ltd. v. Union of India 2005 -TMI - 185 - HIGH COURT OF KERALA]

• Sale of sim cards by a company engaged in providing cellular telephone services to its subscribers fall within the taxable services [Aircell Digilink India Ltd. v. CCE Jaipur 2005 -TMI - 161 - CESTAT, NEW DELHI; Bharti Cellular Ltd. v. CCE Delhi 2005 -TMI - 197 - CESTAT (NEW DELHI)]

• Provision of telephone connection constitutes a sale, as it involves the transfer of right to use goods attracting sales tax, notwithstanding the fact that service is subject to service tax. [State of Uttar Pradesh & Others v. Union of India & Others 2005 -TMI - 143 - SUPREME COURT]

• Transfer of intellectual property, say software, though a medium which is bought and sold as goods (like in case of floppies, discs, CD Rom, punch cards, magnetic tape etc.) would constitute sale purchase of goods and not that of IPR. In one of the cases of sales tax in Tata Consultancy Services v. State of Andhra Pradesh (2008 -TMI - 4143 - Supreme Court) , Supreme Court has held that software may be intellectual property but as the property contained in a medium is bought and sold, it is an article of value and as such, software can be described as goods subject to sales tax.

Supreme Court observed in TCS case (supra) to distinguish between goods and services as under—

"The music is produced by the artistry of musicians and in it is not a good, but when transferred to a laser-readable disc, it becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but when transcribed as a book, it becomes a good".

What constitute 'goods' and is sold by the service provider can not be subjected to service tax which is also evidenced by Notification No. 12/2003-ST dated 20.6.2003 whereby cost of goods or material sold by the service provider to the receiver of services during the course of provision of taxable services is exempt from levy of service tax. Certain abatements also justify this logic.

Anything which is not a good will be called a service. To be a service, some action or rendition of service on the part of service provider is also necessary.

In Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes (2008 -TMI - 2576 - Supreme Court of India), it has been held that payment of service tax and VAT are mutually exclusive. In a composite contracts, both sales and service component can be present.