‘CONSIDERATION’ UNDER THE DEFINITION OF ‘SERVICE’

[Mr. M. GOVINDARAJAN]

Section 65B (44) of the Finance Act, 1994 defines the term ‘service’ as any activity carried out by a person for another person for consideration, and includes a declared service, but shall not include—

1. an activity which constitutes merely,––

1. a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
2. 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
3. a transaction in money or actionable claim;

2. a provision of service by an employee to the employer in the course of or in relation to his employment;
3. fees taken in any Court or tribunal established under any law for the time being in force.

In this article the scope of ‘consideration’ in the definition of ‘service’ will be discussed. 

The term ‘consideration’ has not been defined in the Act.  The Education guide, brought by CBE&C Board gives a brief note for consideration.    

Section 67 of the Act deals with the valuation of taxable services for charging service tax.   According to this section service tax chargeable on any taxable service with reference to its value shall,—

•  in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
• in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is  equivalent to the consideration;
• in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

Explanation (a) to this section defines the term ‘consideration’ as including any amount that is payable for the taxable services provided or to be provided.

Since the above definition is inclusive one the Education Guide refers the definition of ‘consideration’ under Section 2(d) of Contracts Act, 1872.  Section 2(d) of the Contracts Act, 1872 defines the term ‘consideration’ as when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. 

The consideration may be past, executed and executory. The definition of consideration in Section 2(d) uses all these three tenses as below:

• has done or abstained from doing – denotes past tense or part executed consideration;
• does or abstains from doing – denotes present tense or present executed consideration;
• promises to do or to abstain from doing – denotes future tense or executory consideration.

With reference to this definition the Education Guide framed the meaning as 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.

According to this definition consideration may be of two types viz., monetary consideration and non monetary consideration.

Monetary consideration

Monetary consideration means any consideration received in the form of money. 'Money' has been defined in section 65B and 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.

Non monetary condition

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

• Supply of goods and services in return for provision of service
• Refraining or forbearing to do an act in return for provision of service
• Tolerating an act or a situation in return for provision of a service
• Doing or agreeing to do an act in return for provision of service.

The non-monetary consideration also 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.

The education guide gives illustrations for non monetary conditions which are as follows:

• If A agrees to dry clean B's clothes and in turn  B agrees to click A's photograph;
• If A agrees not to open dry clean shop in B's neighborhood and in turn B agrees not to open photography shop in A's neighborhood;
• If A agrees to design B's house and in turn B agrees not to object to construction of A's house in his neighborhood;
• If A agrees to construct 3 flats for B on land owned by B and in turn B agrees to provide one flat to A without any monetary consideration

then for the services provided by A to B, the acts of B are non- monetary consideration provided by B to A. Conversely, for services provided by B to A, similar reasoning will be adopted.

The next question arises is how the value of non monetary consideration could be determined.  The value of non-monetary consideration is 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:-

• On the basis of gross amount charged for similar service provided to other person in the ordinary course of trade;
• Where value cannot be so determined, the equivalent money value of such consideration, not less than the cost of provision of service.

There may be several situations wherein it may be difficult to determine the consideration received by service provider for provision of a service. Such situations can arise on account of several factors such as consideration of service being embedded in the total amount received as consideration for a composite activity involving elements of provisions of service and element of sale of goods or consideration for service being included in the gross amount charged for a particular transaction or consideration of service being wholly or partly in the nature of non-monetary consideration.

The manner has been prescribed under Service Tax (Determination of Value) Rules 2006. These rules inter-alia provide provisions in respect of the following situations:

• Determination of value of service portion involved in execution of works contract.
• Determination of value of service in relation to money changing.
• Determination of value of service portion involved in supply of food and any other article of human consumption or any drinks in a restaurant or as outdoor catering.
• Determination of value where such value is not ascertainable.
• The said rules also specify certain expenditures or costs that are incurred by the service provider which have to be included or excluded.
• The said rules also specify certain commissions or costs that are received by the service provider that have to be included or excluded while arriving at the taxable value.

‘Activity’ to be carried out for ‘consideration’

The definition of ‘service’ provides that an activity should be carried out by a person to another person for consideration. Therefore the scope of the term ‘activity’ should also be analyzed for the term ‘consideration’. The Education Guide gives the implications of the conditions that activity should be carried out for a consideration as below:

• To be taxable an activity should be carried out by a person for a 'consideration'
• Activity carried out without any consideration like donations, gifts or free charities are therefore outside the ambit of service. For example grants given for a research where the researcher is under no obligation to carry out a particular research would not be a consideration for such research.
• An act by a charity for consideration would be a service and taxable unless otherwise exempted.
• 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.
• 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.

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.

Thus 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.

There can be many activities without consideration. 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. 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.

Provisions of free tourism information, access to free channels on TV and a large number of governmental activities for citizens are some of the examples of activities without consideration.

Similarly there could be cases of payments without an activity though they cannot be put in words as being "consideration without an activity". Consideration itself pre-supposes a certain level of reciprocity. Thus grant of pocket money, a gift or reward (which has not been given in terms of reciprocity), amount paid as alimony for divorce would be examples in this category. However a reward given for an activity performed explicitly on the understanding that the winner will receive the specified amount in reciprocity for a service to be rendered by the winner would be a consideration for such service. Thus amount paid in cases where people at large are invited to contribute to open software development (e.g. Linux) and getting an amount if their contribution is finally accepted will be examples of activities for consideration.

The Education Guide also gives some examples for consideration of an activity as detailed below:

Imposition of fine or penalty

To be a service an activity has to be carried out for a consideration. Therefore fines and penalties which are legal consequences of a person's actions are not in the nature of consideration for an activity.

Settlement of dispute

Amount received in settlement of dispute – it would depend on the nature of dispute. Per se such amounts are not consideration unless it represents a portion of the consideration for an activity that has been carried out. If the dispute itself pertains to consideration relating to service then it would be a part of consideration.

Advance payments

Amount received as advances for performance of service - Such advances are consideration for the agreement to perform a service.

Refund of deposit

Deposits returned on cancellation of an agreement to provide a service - Returned deposits are in the nature of a returned consideration. If tax has already been paid the tax payer would be entitled to refund to the extent specified and subject to provisions of law in this regard.

Forfeiture of advances

Advances forfeited for cancellation of an agreement to provide a service - Since service becomes taxable on an agreement to provide a service such forfeited deposits would represent consideration for the agreement that was entered into for provision of service.

Refundable Security deposit

Security deposit that is returnable on completion of provision of service - Returnable deposit is in the nature of security and hence do not represent consideration for service. However if the deposit is in the nature of a colorable device wherein the interest on the deposit substitutes for the consideration for service provided or the interest earned has a perceptible impact on the consideration charged for service then such interest would form part of gross amount received for the service. Also security deposit should not be in lieu of advance payment for the service.

Forfeiture of Security Deposit

Security deposits forfeited for damages done by service receiver in the course of receiving a service - f the forfeited deposits relate to accidental damages due to unforeseen actions not relatable to provision of service then such forfeited deposits.

Excess payment

Excess payment made as a result of a mistake - If returned it is not consideration If not returned and retained by the service provider it becomes a part of the taxable value.

Demurrages

Demurrages payable for use of services beyond the period initially agreed upon e.g. retention of containers beyond the normal period. - This will be consideration and is covered by clause (x) of sub -rule (1) to Rule 6 of the Valuation Rules.

Research grant

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. General grants for researches will not amount to a consideration.

The Education guide is for reference only but it is not exhaustive.   Litigation may arise based on the circumstances of the fact.

Discussions to this article

[Jones Lang LaSalle Property Consultants India Private Limited]

Hi- In case of Bad Debts or consideration is not realized would that still requires the service provider to pay service tax. Since the definition of the “service” says “for consideration” and if that consideration is not realized either in the form money or non-money can the service provider get the service tax paid earlier on the accrual basis?

[MARIAPPAN GOVINDARAJAN]

Dear Sir,

Bad debts is to be written off only. No service tax already paid on accrual basis can be got refunded.

Regards,

Dr. M. Govindarajan