CONCEPT OF SERVICE AND SERVICE TAX

[Dr. Sanjiv Agarwal]

Any Statute is an edict of legislature and it is the duty of judiciary to act upon the true intention of the legislation, while charging sections in any taxing statute is strictly interpreted, no question of strict construction arises when the statutory provision is open to only one meaning. In Commissioner of Wealth Tax v. Hashmathunnisa Begum (AIR 1957 SC 397), apex court held that the vary term ‘interpretation’ means introduction of extrinsic aids and words into the statute for understanding it. This is no doubt best avoided. In Union of India v. Sankal Chand Himat Lal Seth (AIR 1977 SC 2328), apex court held that there cannot be any interpretation in the clear and explicit language of the statute. According to G.P. Singh’s Principles of Statutory Interpretation (8th edition, page 638), ‘proper course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping in mind that no tax can be imposed without words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible’.

In Jetlite (India) Ltd v CCE, New Delhi 2010 -TMI - 78969 – (CESTAT, NEW DELHI), it was held that the Finance Act, 1994 does not define the term ‘Service’. It merely describes the expression. ‘Taxable Service’. In Black’s Law Dictionary, the term ‘service’ has been defined to be an act of doing something useful for a person or a company for a fee. The expression ‘service charges’is defined therein to mean charge assessed for performing of service, such as charges assessed by bank against the expenses of maintaining or servicing a customer checking account. Even while defining the term ‘taxable service’ under the Act, the definition specifies the taxable service to mean any service provided or to be provided to any person.

In Magus Construction (P.) Ltd.’s V. union of India 2008 -TMI - 4479 – (HIGH COURT OF GAUHATI) High Court was dealing with the question as to whether the assessee had been working as service provider for those persons with whom the assessee had entered into agreement and had constructed flats for the purpose of sale to those with whom such agreements were entered into.  In Magus Construction (P.) Ltd’s case (supra), the agreement between the parties thereto clearly disclosed that the same was in the nature of purchase and sale of premises and not for carrying out constructional activity on behalf of the prospective buyers, and the assessee was selling flats/ premises and the entire transaction was nothing but the sale and purchase of immovable properties. It was observed by the High Court that even the registering authorities treated the documents as the agreement of sale/purchase of flats/ premises inasmuch as the consideration was for sale and not for carrying constructional activities and stamp duty was levied on sale consideration.  The Gauhati High Court taking into consideration various provisions of the Finance   Act observed that the term "service” has not been defined in the said Act by way of any explanation or otherwise or by the Rules framed thereunder though the said term is defined under various other statutes. Reference was made in that regard to the Income-tax Act, 1961, Monopolies and Restricted Trade Practices Act, 1969, Consumer Protection Act, 1986 and Foreign Exchange Amendment Act, 1999 and it was held thus:

“29. In the light of the various statutory definitions of “service”, one can safely define “service” as an act of helpful activity, an act of doing something useful, rendering assistance or help. Service does not involve supply of goods; ‘service’ rather connotes transformation of use/user of goods as a result-of voluntary intervention of service provider and is an intangible commodity in the form of human effort. To have “service", there must be a “service provider" rendering services to some other person(s), who shall be recipient of such “service”.  Under the Finance Act, 1994, “service tax" is levied on “taxable service" only and not on “service provider". A “service provider" is only a means for deposit of the service tax to the credit of the Central Government Although the term “service receiver”  has not been defined   the Finance Act, 1994, the service receiver is a person, who receives or avails the services provided by a “service” provider". 

31. From the provisions of the law extracted hereinabove, it becomes abundantly clear that the burden of registration and payment of "service tax" is on the person, who provides "taxable service" to any person. According to the petitioner­ company, it does not provide any "taxable service" to any person so as to warrant its registration under the Finance Act, 1994, and/or to pay any "service tax" thereunder. Any part of constructional activity for construction of building, which is carried out by the petitioner-company, is not a "service" rendered to any one, but an activity, which is carried out by the petitioner-company, for its own self. Since the very concept of rendering of "service" implies two entities, one, who renders the "service '; and the other, who is recipient thereof, it becomes transpar­ent that an activity carried on by a person for himself or for his own benefit, cannot be termed as "service" rendered.

32. Prior to the amendment of the Finance Act, 1994, in the year 2005, the Central Board of Excise and Customs, vide Circular No. 80/10/2004, dated September 17, 2004, clarified that "estate builders", who construct buildings/premises for themselves (for their own use, renting it out or for sale thereof subsequently) are not covered within ambit of the "construction services". Clause 13.1 of this circular states as under:

"13.1 Services provided by a commercial concern in relation to construction, repairs, alteration or restoration of such building, civil structures or parts thereof which are used, occupied or engaged for the purposes of commerce and industry are covered under this new levy. In this case the service is essentially provided to a person who gets such constructions, etc., done, by a building or civil contractor. Estate builders who construct building! civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. However, if such real estate owners hire contractor! contractors, the payment made to such contractor would be subjected to 'service tax' under this head. The tax is-limited only in case the service is provided by a commercial concern. Thus, service provided by a labourer engaged directly by the property owner, or a contractor who does not have a business establishment would not be subject to 'service tax'.

33. The clarification offered under the abovementioned circular, shall be appli­cable even after amendment of the Finance Act, 2005, whereby "construction service" includes construction of "residential complex". Thus, construction of "residential complex" has also been brought within the purview of service tax and what kind of activities for "residential complex" would attract "service tax" would have to be understood in the light of the clarification, which the circular aforementioned offers." [Emphasis supplied].

In All India Federation of Tax Practioners  v Union of India (2007 -TMI - 1556 - Supreme Court), it was observed that  the source of the concept of service tax lies in economics. It is an economic concept. It has evolved on account of Service Industry becoming a major contributor to the GDP of an economy, particularly knowledge based economy. With the enactment of Finance Act, 1994, the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of article 268A in the Constitution vide Constitution (Eighty eighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also introduced in the Union List for the levy of service tax. As stated above, as an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003. Further, it is important to note, that 'service tax' is a value added tax which in turn is a general tax which applies to all commercial activities involving production of goods and provision of services. Moreover, VAT is a consumption tax as it is borne by the client) .

Full bench of Cestat, New Delhi In CCE, Raipur v BSBK Pvt. Ltd 2010 -TMI - 76005 – (CESTAT, NEW DELHI – LB) held that  the term ‘service’ generally  means service of any description which is made available to potential user and includes the provision of facilities. Such term has variety of meanings. It may mean any benefit or any act resulting in promoting or serving interest of the recipient. It may be contractual, professional, public, domestic, legal, and statutory, etc. How it should be understood and what it means depends in the context in which it has been used in an enactment. An activity in the nature of service whether provided individually or integrally and solely, separately or combinedly with other activities has its identity. Permutation and combination of activities or services do not change character of the activity or service. It may be possible that while an activity in a cluster of activities may be dominant, others may not be prominent. But each activity has its identity, existence and independence and play its role. A plain and simple service contract or a composite contract comprising of various activities of different nature of services do not make any difference to discern role of each service involved in a composite or turnkey contract. Difficulty may arise only in determination of assessable value of such service involved in such contracts. But article 366(29A)(b), read with articles 286A and 246, has obviated such difficulty enabling to  determine value of goods segregating the same from different elements of service involved in these contracts. Both the elements being, thus, segregated, fall into respective fields of taxation under List-I and List-II to the Seventh Schedule of the Constitution.

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