ACTIONABLE CLAIMS ARE NOT A 'SERVICE'

[Dr. Sanjiv Agarwal]

What is Service

According to definition of service in section 65B (44) of the Finance Act, 1994, 'service' means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include -

(a) an activity which constitutes merely,––

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ia) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or,

(ii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

Further, explanation 1A provides that transaction in money shall not include any activity relating to the use of money or its 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.

Transactions in money and actionable claim shall be out of scope of ‘service’. According to explanation ‘1A’, such exclusion of money transaction will not include any activity relating to the use of money or its 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.

In Delhi Chit Fund Association v. Union of India 2013 (4) TMI 630 - DELHI HIGH COURT, Delhi High Court observed that there are four elements in the word ‘Service’:

a) the person who provides the service,

b) the person who receives the service,

c) the actual rendering of the service, and

d) the consideration for the service.

Unless all the above four elements were present, the activity could not be charged with service tax. A mere transaction in money or actionable claim could not under the ordinary notions of a service be considered as a service, because it lacked the four constituent elements which were required by the definition. In a mere transaction in money or actionable claim, no service was involved. There was just the payment and receipt of the money.

Supreme Court in Union of India v. Delhi Chit Fund Association 2014 (3) TMI 306 - SUPREME COURT OF INDIA has reaffirmed the Delhi High Court decision and dismissed the Government’s special leave petition holding that chit funds are not liable to Service Tax as these represent transactions in money.

What is Actionable Claim

Actionable claim shall have meaning assigned to it in section 3 of the Transfer of Property Act, 1882. Accordingly, actionable claim means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable 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.

The ‘actionable claim’ as defined in Section 3 of the Transfer of Property Act, 1882 comprises two types of claims: (a) a claim to unsecured debts and (b) a claim to beneficial interest in movable property. If the beneficial interest in movable property is not in possession of the claimant it will be an actionable claim but if it is in his possession or enjoyment, it will not be actionable claim but a chose in possession. H. Anraj v. Govt. of T.N., 1985 (10) TMI 258 - SUPREME COURT OF INDIA.

Elements of Actionable Claim

(i) It is any type of debt other than a debt secured by mortgage of immovable property or by hypothecation or pledge.

(ii) Any beneficial interest in movable property not in possession- either actual or constructive of claimant.

(iii) Civil courts showed recognize as affording grounds for relief.

For example, ‘A’ borrows ₹ 5000/- from ‘B’ at 12% per annum interest on 1st April, 2006 and promises to pay back the amount with interest on 1st July, 2006. Till 1st July, 2006, the debt is an accruing debt and is an actionable claim.

Illustrations of actionable claim are -

• unsecured debts
• right to participate in the draw to be held in a lottery.
• right to claim and recover insurance money
• arrears of rent
• Right to return earnest money,
• Claim for unpaid dower (in case of Muslim women)
• Claim for share in partnership.
• The right to the proceeds a business.

However, it would exclude coupons and vouchers.

In Sunrise Associates v. Govt. of NCT of Delhi 2006 (4) TMI 118 - SUPREME COURT of INDIA, it was held that lottery tickets are ‘goods’ in the wider sense of the term though it is an ‘actionable claim’ and that it is only on account of the statutory exclusion from the definition of goods in various State Sales Tax Laws that it has been held not to be ‘goods’. In the matter of Martin Lottery Agencies Ltd. v. Union of India 2007 (9) TMI 39 - HIGH COURT, SIKKIM , it was held relying upon Sunrise Associates case (supra) that lottery ticket is an ‘actionable claim’ and, therefore, outside the purview of ‘service’ and said judgment was not interfered with by the Supreme Court.

In Sunrise Associates v. Govt. of NCT of Delhi 2006 (4) TMI 118 - SUPREME COURT of INDIA lotteries have been held to be nothing but a transfer of actionable claim. Therefore, from the very provisions introduced by the Finance Act, 2012, i.e., clause (1) of Section 65B read with clause (44), lottery stand excluded by implication from the purview of service tax.

In Future Gaming Solution India Pvt. Ltd. v. Union of India 2013 (11) TMI 1003 - SIKKIM HIGH COURT , it was held that lottery is neither goods nor service but actionable claim and that transactions merely in actionable claims are excluded from ‘service’ and therefore, outside the scope of definition of word ‘service’. Since transaction did not amount to service under Finance Act, 1994 any attempt to levy Service Tax thereon by resorting to rule 6(7C) of Service Tax Rules, 1994 was invalid as rules cannot override the provisions of the Act. In this case, assessee was engaged in business of sale of lottery tickets organised by Government of Sikkim under an agreement whereby assessee procured lottery tickets in bulk from Government and resold them to public through various agents, stockists, resellers, etc. Department sought levy of service tax thereon arguing that said activity amounted to provision of services by way of promoting, marketing, etc. and was liable to service tax as per rule 6(7C) of Service Tax Rules, 1994. It was held that -

“Where the transaction is purely that of sale and purchase from which the component of service cannot be clearly segregated and is undiscernible, no service tax is payable and that where the two components of ‘sale’ and ‘service’ are capable of compartmentalisation service tax may be leviable on the service component in a transaction.

The Department was seeking to impose service tax upon the assessee under the Finance Act, 1994, on the erroneous premises that the assessee was a service provider engaged in assisting in arranging sale of lottery ticket for the Government of Sikkim. Said attempt was clearly unsustainable.

Clause (1) of section 65B has defined ‘actionable claim’ as having the same meaning assigned to it in section 3 of the Transfer of Property Act. Clause (44) defined service inter alia to mean any activity carried out by a person for another for consideration but not to include amongst others a transaction in money or actionable claim”.

In Tata Sky Ltd. v. State of MP 2013 (4) TMI 373 - SUPREME COURT, it was held that Direct to Home (DTH) is not an actionable claim as recharge vouchers did not create a beneficial interest in a movable property but only enable a person to enjoy a particular service.

However, activity of ‘factoring’ constitutes debt collection services and does not amount to ‘transaction merely in actionable claim’ and as such, the services of factoring are taxable services Finanzamt Grob - Gerau v. MKG - Kraftfahrzeuge - Factory Gmbh [(2013) 39 STT 17 (ECJ)].

Mere transaction in money or actionable claim can neither be considered as a service nor fall within first part of the definition because it lacks four elements of service. The intention of legislature in excluding it from the definition of service is to exclude any service rendered in connection with transaction in money or actionable claim, even though there is no reference to any service rendered. Legislature has deemed it fit, ex abundanti cautela, to exclude mere transaction in money, which even otherwise could not have been considered as a service in any sense of the word. It was further held that the definition of service is drafted in very confounding manner, but courts have to make sense of what they have got.