CLASSIFICATION OF TAXABLE SERVICES - Section 65A

[Dr. Sanjiv Agarwal]

Classification of Services (Section 65A)

Under which category a service will fall is governed by the provisions of Section 65A of Finance Act, 1994 and any service ought to be appropriately classified into one taxable service using the guiding principles set out therein. Classification of services shall be done as per section 65A of the Finance Act, 1994. Section 65A was inserted by Finance Act 2003 to specify the norms for classification of taxable services under section 65 of the Finance Act, 1994. The basic principles of classification of a taxable service, under which service is prima facie is classifiable would be as follows -

(i) A taxable service would be classified in the category which gives the most specific description of the service provided.

(ii) In case the taxable service is a service consisting of combination of services, such taxable service will be classified in the category which gives such service its essential character.

(iii) Where a taxable service can not be classified in any of the above two ways, such taxable service will be classified in the category which occurs first in sub-section (105) among those categories which equally merit consideration.

Thus, section 65A lays down the basic principles of classifying the taxable services. The classification is based on specific description or essential character of the service. If the service cannot be classified on these criteria, classification will be based on sequence of entry of services in section 65 (105). Clause 105 of section 65 arranges the taxable services in the order in which they came under the tax net, i.e., on FIFO basis. The taxable service which was taxed first is placed above the service which was taxed later. Thus, in case of a confusion or doubt, a service will be classified in the category which was first taxed.

Service tax shall be charged only under a specific category of taxable service and not on any assumption or arbitrary basis. At the same time, merely because there is any dispute or doubt about classification, the taxability of service cannot be vitiated altogether. A person can register himself and pay service tax from any one or more services rendered by him.

Judicial Pronouncements

Following judicial pronouncements are worth noting in this regard-

(a) In Super Poly Fabrics Ltd. v. CCE, Ludhiana 2007 -TMI - 816 - CESTAT, NEW DELHI, it was held that taxable services are to be determined in terms of sub-clauses under clause (105) of section 65 of the Finance Act, 1994 and resort to section 65 (2b) should be made only if taxable services becomes classifiable under two or more sub-clauses. Section 65A(1) makes it clear that taxable services shall be determined according to the terms of the said clauses of clause (105) of section 65 and when for any reason a taxable service becomes classifiable under two or more sub-clauses, then only resort to sub-section 2(b) could be taken.

(b) In Dr. Lal Path Lab. Pvt. Ltd. v. CCE, Ludhiana 2007 -TMI - 761 - Appellate Tribunal, New Delhi, it was held that item covered by specific entry in tax code cannot be taken out and taxed under other entry. Bringing services under general entry owing to exemption under specific entry was held as not sustainable. What is specifically kept out of a levy by the legislature cannot be subjected to tax by revenue authorities under another entry.

(c) In Coal Handlers Pvt. Ltd. v. CCE Kolkata-I 2005 -TMI - 151 - CESTAT, KOLKATA, it was held that a particular service can be taxed only under one head of service and that proper classification should be done in terms of section 65A.

Departmental Clarifications

According to Ministry of Finance's TRU Letter No. 334/4/2006 -TRU dated 28.02.2006, following clarification have been issued -

"Often services provided consist of more than one service. In such cases, it is important to decide, for the purpose of classification of services, whether each element of the transaction should be treated separately or as a single composite transaction, albeit, made up of two or more separate services. A composite service, even if it consists of more than one service, should be treated as a single service based on the main or principal service and accordingly classified. The decision is to be made on question of facts and law. It will not make a difference if the tax rates of the components are the same as that of the principal service. The problem may arise when some elements are taxable and other are exempt. While taking a view, both the form and substance of the transaction are to be taken into account. The guiding principle is to identify the essential features of the transaction. The method of charging does not in itself determine whether the service provided is a single service or multiple services. ..It is advisable that the scope and coverage of individual service should be interpreted strictly in accordance with the statutory provisions. This aspect needs to be kept in mind while classifying the taxable services".

According to TRU Letter No. 334/1/2008 -TRU dated 29.02.2008, following further clarifications have been issued -

"a) Taxable services are defined separately under clause (105) of Section 65 of the Finance Act, 1994. Services are supplied as a single composite service by bundling number of different services or disaggregating a single supply into different components. Tax liability may vary depending upon the treatment of the transaction either as a single composite service or multiple supply of service. For the purpose of levy of service tax, a single composite service is to be classified under any one of the specified taxable services.

b) For the purpose of classification of a service covering number of separate services, a view has to be taken as to whether an individual service is merely a component of the overall supply or is itself a distinct and independent supply i.e., whether the component is merely ancillary to the principal supply or the component can be considered as separate taxable service in its own right. A service, which does not constitute for a customer an aim in itself but a means of better enjoying the principal supply, is considered as a supply ancillary to the principal supply

c) Section 65A states the principles for classification of taxable services.

Classification of a composite service is based on that component of the service which gives the essential character. There is a need to determine whether a given transaction is the one containing major and ancillary elements or the one containing multiple and separate major elements. In the case of a transaction containing a major and ancillary elements, classification is to be determined based on the essential features or the dominant element of the transaction. A supply which comprises a single supply from an economic point of view should not be artificially split. The method of charging or invoicing does not in itself determine whether the service provided is a single service or multiple services. Single price normally suggests a single supply though not decisive. The real nature and substance of the transaction and not merely the form of the transaction should be the guiding factor for deciding the classification ...".