Taxability of Processing or Clearing House Services

[Dr. Sanjiv Agarwal]

Service tax has been imposed on ‘processing and clearing house services’ by Finance Act, 2008 with effect from 16.5.2008 vide Notification No. 18/2008-ST dated 10.5.2008. These services are provided in relation to securities transactions and trading in goods and forward contracts. The gross amount charged or consideration received by processing and clearing houses including clearing corporations shall be chargeable to service tax.

Meaning of Processing or Clearing House

Section 86(d) defines ‘processing or clearing house’ as under –

‘Processing and clearing house’ means any person including the clearing corporation authorized or assigned by a recognized stock exchange, recognized association or a registered association to perform the duties and functions of a clearing house in relation to, –

(i) the periodical settlement of contracts for, or relating to, the sale or purchase of securities, goods or forward contracts and differences thereunder;

(ii) the delivery of, and payment for, securities, goods or forward contracts;

(iii) any other matter incidental to, or connected with, securities, goods and forward contracts.

The words - processing, clearing and settlement have the following meanings –

The word ‘process’ implies a series of actions or steps to be taken in order to active a particular end.

Clearing means settlement or clearance of accounts, for a fixed period, in a Stock Exchange; the practice of organizing the payment of financial instruments (such as cheques); In the UK, commercial banks are usually members of the Banker’s Clearing House, which settles their daily balance (Advanced Law Lexicon - P Ramanatha Aiyar)

“Settle means to adjust or ascertain to pay”

In contracts, it is an agreement by which two or more persons who have dealings together so far arrange their accounts as to ascertain the balance due from one to the other; payment in full.

Webster defines ‘settle’ as meaning, in law, ‘to adjust to liquidate; to balance, as an account; to pay, as a debt.

‘To settle’ is either synonymous with ‘to adjust’ or it means ‘to pay’.

Discharge of a debt or claim; settling of a sum of money on a wife as a provision for herself and children; and fortnightly settling period.

Act of paying in full for goods or services received, or of repaying a debt or loan. See settlement date and settlement discount.

The squaring off of a derivative transaction at its maturity termination by the relevant party making the required net payment and settling the transaction. In a credit derivative, if credit event has not taken place, the derivative is settled on maturity without any payment by the protection seller; if a credit event has taken place on or before maturity, the transaction is settled either by a cash settlement or physical settlement. (Source - Advanced Law Lexicon - P Ramanatha Aiyar)

Stock exchanges provide services to their members to facilitate and complete the transactions, settlement and effecting of payment. These services are provided through their clearing and processing houses. Similar services are required at the commodity exchanges in relation to trading in goods and forward contract. The stock exchanges and commodity exchanges have their own clearing and/or processing houses or engage the services of independent clearing corporations for such activities.

Finance Act, 2008 has brought such services of processing and clearing houses into the service tax net.

Following are the basic features of a processing and clearing house—

(i) Processing and clearing house can be any person (though individuals do not act as clearing houses).

(ii) It also includes clearing corporation authorized or assigned to perform functions and duties of a clearing house by stock exchange, recognized association or registered association.

(iii) Such processing or clearing house should perform services in relation to securities, goods or forward contracts of –

(a) settlement of contracts for sale and purchase and differences in respect of such transactions.

(b) delivery of and payment for such transactions.

(c) any other matter incidental to, or connected with such transactions.

Taxable service

Section 65(105)(zzzzi) defines taxable service is in relation to processing and clearing house as under –

Any service provided or to be provided to any person, by a processing and clearing house in relation to processing, clearing and settlement of transactions in securities, goods or forward contracts including any other matter incidental to, or connected with, such securities, goods and forward contracts.

This taxable service has been introduced by Finance Act, 2008. w.e.f. 16.5.2008. Two more taxable services have also been introduced by Finance Act, 2008, w.e.f. 16.5.2008 viz,

— recognized stock exchange services (zzzzg).

— recognized or registered association services (zzzzh).

The aforementioned two services also include processing, clearing and settlement of transactions.

To be a taxable service, following conditions should be satisfied –

(a) Service could be provided to any person and not necessarily to investor or member of concerned exchange or association.

(b) Service should be provided by a processing and clearing house.

(c) Services provided should relate to processing, clearing and settlement of transactions.

(d) These transactions should be in securities, goods or forward contracts.

(e) Taxable services shall include any other matter (services) incidental to or connected with such securities, goods or forward contracts.

The services of processing, clearing and settlement undertaken by stock exchanges or associations themselves or through an outsourced clearing house (say, Clearing Corporation of India Ltd. or HDFC Bank or National Clearing Corporation Ltd. etc.), both shall be subject to levy of service tax.

Transactions in securities market, and commodities market are done by investors/traders in stock exchanges and commodity exchanges. Now-a-days, almost all transactions are done electronically. Once a trade is confirmed between a broker and investor, it is processed by the clearing house. The effecting of transaction, processing of transaction, delivery of subject securities and trades, net delivery position, pay in and pay outs, auctions, netting off and differences in transactions, margins etc. are done by processing and clearing houses on commercial basis, i.e., against service charges levied on brokers or members. These services shall be taxable service under this category (zzzzi).

Departmental Clarification

Ministry of Finance has vide Circular No. DOF 334/1/2008-TRU dated 29-2-2008 clarified as under in relation to this taxable service –

“Transfer of the right to use any goods is leviable to sales tax/VAT as deemed sale of goods [Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods.

Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service.

Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid”.

Earlier, CBEC had clarified vide its Letter No. F. No. 137/57/2006-CX-4 dated 18.5.2007 that processing, clearing and settlement services provided by NSE/BSE/MCX/NCDEX/NSCCL/BIOSL/CCIL do not fall under any of the applicable taxable services such as online information and database access or retrieval, business auxiliary services or club and association services.

Though these were services, they did not fall under any taxable service. However, if service of online information is provided by exchange on payment basis to market reporting agency or any other person, the same would be liable to levy of service tax. In view of this, such services shall be taxable with effect from Finance Act, 2008 only.

Person Liable

Any person providing processing & clearing house services or activities to any other person shall be liable to pay service tax and shall be treated as an assessee for service tax purposes.

 

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