Declared Services. - Taxation of Services an Education Guide by CBEC - Service Tax

Guidance Note 6 - Declared Services In the definition of 'service' contained in clause (44) of section 65B of the Act it has also been stated that service includes a declared service. The phrase 'declared service' is also defined in the said section as an activity carried out by a person for another for consideration and specified in section 66E of the Act. The following nine activities have been specified in section 66E : 1. renting of immovable property; 2. construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority; 3. temporary transfer or permitting the use or enjoyment of any intellectual property right; 4. development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software; 5. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; 6. transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods; 7. activities in relation to delivery of goods on hire purchase or any system of payment by instalments; 8. service portion in execution of a works contract; 9. service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity. The above activities when carried out by a person for another for consideration would amount to provision of service. Most of these services are presently also being taxed except in so far as SI. No.5 is concerned. It is clarified that they are amply covered by the definition of service but have been declared with a view to remove any ambiguity for the purpose of uniform application of law all over the country. 6.1 Renting of Immovable Property Renting has been defined in section 65B as allowing, permitting or granting access, entry, occupation, usageor any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property' 6.1.1 Is renting of all kinds of immovable property taxable? No. Renting of certain kinds of immovable properties is specified in the negative list. These are- renting of vacant land, with or without a structure incidental to its use, relating to agriculture. (S.I no. (d) (iv) of Exhibit A1) renting of residential dwelling for use as residence (SI. No. (m) of Exhibit A1) renting out of any property by Reserve Bank of India renting out of any property by a Government or a local authority to a non-business entity. Renting of all other immovable properties would be taxable unless covered by an exemption (refer 6.1.2). 6.1.2 Are there any exemptions in respect of renting of immovable property? Yes. These are:- Threshold level exemption up to ₹ 10 lakh. Renting of precincts of a religious place meant for general public is exempt. Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent is exempt. Renting to an exempt educational institution 6.1.3 Would permitting usage of a property for a temporary purpose like conduct of a marriage or any other social function be taxable? Yes. As per definition allowing or permitting usage of immovable property, without transferring possession of such property, is also renting of immoveable property. 6.1.4 Would activities referred to in column 1 of a table below be chargeable to service tax? S. No. Journey Taxability 1. Renting of property to an educational body Exempted if provided to an educational institution for the purpose of education which is exempt from the levy of service tax; to others will be taxable. 2. Renting of vacant land for animal husbandry or floriculture Not chargeable to service tax as it is covered in the negative list entry relating to agriculture 3. Permitting use of immoveable property for placing vending/dispensing machines Chargeable to service tax as permitting usage of space is covered in the definition of renting 4. Allowing erection of a communication tower on a building for consideration. Chargeable to service tax as permitting usage of space is covered in the definition of renting 5. Renting of land or building for entertainment or sports Chargeable to service tax as there is no specific exemption. 6. Renting of theatres by owners to film distributors (including under a profitsharing arrangement) Chargeable to service tax as the arrangement amounts to renting of immovable property. 6.1.5 Whether hotels/restaurants/convention centres letting out their halls, rooms etc. for social, official or business functions or letting out of halls for cultural functions fall within the scope of this declared list service? Halls, rooms etc. let out by hotels/restaurants for a consideration for organizing social, official or business functions or letting out of halls for cultural functions are covered within the scope of renting of immovable property and would be taxable if other elements of taxability are present. 6.2 Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority. This service is already taxable as part of construction of residential complex service under clause (zzzh) of sub-section 105 of section 65 of the Act and as part of service in relation to commercial or industrial construction under clause (zzq) of sub-section 105 of section 65 of the Act. This entry covers the services provided by builders or developers or any other person, where building complexes, civil structure or part thereof are offered for sale but the payment for such building or complex or part thereof is received before the issuance of completion certificate by a competent authority. 6.2.1 What would be the liability to pay service tax on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights and to other buyers. If payable, how would the services be valued? Here two important transactions are identifiable: (a) sale of land by the landowner which is not a taxable service; and (b) construction service provided by the builder/developer. The builder/developer receives consideration for the construction service provided by him, from two categories of service receivers: (a) from landowner: in the form of land/development rights; and (b) from other buyers: normally in cash. Construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/ developers even for the flats given to the land owner. It may be pointed out that in a recent judgement passed by the Mumbai High Court in the case of Maharashtra Chamber of Housing Industry and Others v. Union of India [2012 (1) TMI 98 (HC) ] has upheld the Constitutional validity of levy of service tax, under clauses (zzzh) and (zzzzu) of section 65, on similar construction services provided by a builder. A relevant portion of the judgement is reproduced below- 29. The charge of tax under Section 66 of the Finance Act is on the taxable services defined in clause (105) of Section 65 . The charge of tax is on the rendering of a taxable service. The taxable event is the rendering of a service which falls within the description set out in sub-clauses (zzq), (zzzh) and (zzzzu). The object of the tax is a levy on services which are made taxable. The fact that a taxable service is rendered in relation to an activity which occurs on land does not render the charging provision as imposing a tax on land and buildings. The charge continues to be a charge on taxable services. The charge is not a charge on land or buildings as a unit. The tax is not on the general ownership of land. The tax is not a tax which is directly imposed on land and buildings. The fact that land is subject to an activity involving construction of a building or a complex does not determine the legislative competence of Parliament. The fact that the activity in question is an activity which is rendered on land does not make the tax a taxon land. The charge is on rendering a taxable service and the fact that the service is rendered in relation to land does not alter the nature or character of the levy. The legislature has expanded the notion of taxable service by incorporating within the ambit of clause (zzq) and clause (zzzh) services rendered by a builder to the buyer in the course of an intended sale whether before, during or after construction. There is a legislative assessment underlying the imposition of the tax which is that during the course of a construction related activity, a service is rendered by the builder to the buyer. Whether that assessment can be challenged in assailing constitutional validity is a separate issue which would be considered a little later. At this stage, what merits emphasis is that the charge which has been imposed by the legislature is on the activity involving the provision of a service by a builder to the buyer in the course of the execution of a contract involving the intended sale of immovable property. 30. Parliament, in bringing about the amendment in question has made a legislative assessment to the effect that a service is rendered by builders to buyers during the course of construction activities. In our view, that legislative assessment does not impinge upon the constitutional validity of the tax once, the true nature and character of the tax is held not to fall within the scope of Entry 49 of List II. So long as the tax does not fall within any head of legislative power reserved to the States, the tax must of necessity fall within the legislative competence of Parliament. This is a settled principle of law, since the residuary power to legislate on a field of legislation which does not fall within the exclusive domain of the States is vested in Parliament under Article 248 read with Entry 97 of List I. Value, in the case of flats given to first category of service receiver will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly. 6.2.2 What would be the service tax liability in the following model - land is owned by a society, comprising members of the society with each member entitled to his share by way of an apartment. Society/individual flat owners give 'No Objection Certificate' (NOC) or permission to the builder/developer, for re-construction. The builder/ developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following: (i) construct some additional flats for sale to others; (ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of reconstruction; (iii) pay an additional amount to the original owners of flats in the society. Under this model, the builder/developer receives consideration for the construction service provided by him, from two categories of service receivers. First category is the society/members of the society, who transfer development rights over the land (including the permission for additional number of flats), to the builder/developer. The second category of service receivers consist of buyers of flats other than the society/members. Generally, they pay by cash. Re-construction undertaken by a building society by directly engaging a builder/developer will be chargeable to service tax as works contract service for all the flats built now. 6.2.3 When a certain number of flats are given by the builder/developer to a land owner in a collaborative agreement to construct, lieu of the land or development rights transferred, will such transferee be required to pay service tax on further sale of flats to customers? Yes. The service tax will be required to be paid by such transferee if any consideration is received by him from any person before the receipt of completion certificate. 6.2.4 What would be the service tax liability on conversion of any hitherto untaxed construction /complex or part thereof into a building or civil structure to be used for commerce or industry, after lapse of a period of time? Mere change in use of the building does not involve any taxable service. If the renovation activity is done on such a complex on contract basis the same would be a works contract as defined in clause (44) of section 65B service portion, which would also be taxable if other ingredients of taxability are present. 6.2.5 What would be the service tax liability on Build- Operate - Transfer (BOT) Projects? Many variants of this model are being followed in different regions of the country, depending on the nature of the project. Build-Own-Operate-Transfer (BOOT) is a popular variant. Generally under BOT model, Government, concessionaire (who may be a developer/builder himself or may be independent) and the users are the parties. Risk taking and sharing ability of the parties concerned is the essence of a BOT project. Government by an agreement transfers the 'right to use' and/or 'right to develop' for a period specified, usually thirty years or near about, to the concessionaire. Transactions involving provision of service take place usually at three different levels: firstly, between Government and the concessionaire; secondly, between concessionaire and the contractor and thirdly, between concessionaire and users. At the first level, Government transfers the right to use and/or develop the land, to the concessionaire, for a specific period, for construction of a building for furtherance of business or commerce (partly or wholly). Consideration for this taxable service may be in the nature of upfront lease amount or annual charges paid by the concessionaire to the Government. Such services provided by the Government' would be in the negative list entry contained in clause (a) of section 66D unless these services qualify as 'support services provided to business entities' under exception sub- clause (iv) to clause (a) of section 66D . 'Support services have been defined in clause (49) of section 65B as 'infrastructural, operational, administrative, logistic marketing or any other support of any kind comprising functions that entities carry out in the ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of movable or immovable property, security, testing and analysis'. If the nature of concession is such that it amounts to 'renting of immovable property service' then the same would be taxable. The tax is required to be paid by the government as there is no reverse charge for services relating to renting of immovable property. In this model, though the concessionaire is undertaking construction of a building to be used wholly or partly for furtherance of business or commerce, he will not be treated as a service provider since such construction has been undertaken by him on his own account and he remains the owner of the building during the concession period. However, if an independent contractor is engaged by a concessionaire for undertaking construction for him, then service tax is payable on the construction service provided by the contractor to the concessionaire. At the third level, the concessionaire enters into agreement with several users for commercially exploiting the building developed/constructed by him, during the lease period. For example, the user may be paying a rent or premium on the sub-lease for temporary use of immovable property or part thereof, to the concessionaire. At this third level, concessionaire is the service provider and user of the building is the service receiver. Service tax would be leviable on the taxable services provided by the concessionaire to the users if the ingredients of taxability are present. There could be many variants of the BOT model explained above and implications of tax may differ. For example, at times it is possible that the concessionaire may outsource the management or commercial exploitation of the building developed/constructed by him to another person and may receive a pre-determined amount as commission. Such commission would be a consideration for taxable service and liable to service tax. 6.2.6 If the builder instead of receiving consideration for the sale of an apartment receives a fixed deposit, which it converts after the completion of the building into sales consideration, will it amount to receiving any amount before the completion of service. This may be a colorable device wherein the consideration for provision of construction service is disguised as fixed deposit, which is unlikely to be returned. In any case the interest earned by the builder on such fixed deposits will be a significant amount received prior to the completion of the immovable property. As clarified at serial no. 5 of the table in point no 2.3.2 interest in such cases would be considered as part of the gross amount charged for the provision of service. 6.2.7 In certain States requirement of completion certificate are waived of for certain specified types of buildings. How would leviability of service tax be determined in such cases? In terms of Explanation to clause (b) of section 66E in such cases the completion certificate issued by an architect or a chartered engineer or a licensed surveyor of the respective local body or development or planning authority would be treated as completion certificate for the purposes of determining chargeability of service tax. 6.2.8 If the person who has entered into a contract with the builder for a flat for which payments are to be made in 12 installments depending on the stage of construction and the person transfers his interest in the flat to a buyer after paying 7 installments, would such transfer be an activity chargeable to service tax? Such transfer does not fall in this declared service entry as the said person is not providing any construction service. In any case transfer of such an interest would be transfer of a benefit to arise out of land which as per the definition of immoveable property given in the General Clauses Act, 1897 is part of immoveable property. Such transfer would therefore be outside the ambit of 'service' being a transfer of title in immoveable property. 6.3 Temporary transfer or permitting the use or enjoyment of any intellectual property right 6.3.1 What is the scope of the term 'intellectual property right'? 'Intellectual property right' has not been defined in the Act. The phrase has to be understood as in normal trade parlance as per which intellectual property right includes the following:- Copyright Patents Trademarks Designs Any other similar right to an intangible property 6.3.2 Is the IPR required to be registered in India? Would the temporary transfer of a patent registered in a country outside India also be covered under this entry? Since there is no condition regarding the law under which an intellectual right should be registered, temporary transfer of a patent registered outside India would also be covered in this entry. However, it will become taxable only if the place of provision of service of temporary transfer of intellectual property right is in taxable territory. 6.4 Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software The term 'information technology software' has been defined in section 65B of the Act as 'any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment'. 6.4.1 Would sale of pre-packaged or canned software be included in this entry? No. It is a settled position of law that pre-packaged or canned software which is put on a media is in the nature of goods [Supreme Court judgment in case of Tata Consultancy Services v. State of Andhra Pradesh [2004 (11) TMI 11 (SC)] . Sale of pre-packaged or canned software is, therefore, in the nature of sale of goods and is not covered in this entry. 6.4.2 Is on site development of software covered under this entry? Yes. On site development of software is covered under the category of development of information technology software. 6.4.3 Would providing advice, consultancy and assistance on matters relating to information technology software be chargeable to service tax? These services may not be covered under the declared list entry relating to information technology software. However, such activities when carried out by a person for another for consideration would fall within the definition of service and hence chargeable to service tax if other requirements of taxability are satisfied. 6.4.4 Would providing a license to use pre-packaged software be a taxable service? The following position of law needs to be appreciated to determine whether a license to use pre packaged software would be goods- As held by the Hon'ble Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh [2004 (11) TMI 11 (SC)] ] pre-packaged software or canned software or shrink wrapped software put on a media like is goods. Relevant portion of para 24 of the judgment is reproduced below- A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become goods . We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of goods within the meaning of the term as defined in the said Act. The term all materials, articles and commodities includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes. Therefore, in case a pre-packaged or canned software or shrink wrapped software is sold then the transaction would be in the nature of sale of goods and no service tax would be leviable. The judgement of the Supreme Court in Tata Consultancy Service case is applicable in case the pre-packaged software is put on a media before sale. In such a case the transaction will go out of the ambit of definition of service as it would be an activity involving only a transfer of title in goods. As per the definition of 'service' as contained in clause (44) of section 65(B) only those transactions are outside the ambit of service which constitute only a transfer of title in goods or such transfers which are deemed to be a sale within the meaning of Clause 29(A) of article 366 of the Constitution. The relevant category of deemed sale is transfer of right to use goods contained in sub-clause (d) of clause (29A) of the Constitution. 'Transfer of right to use goods' is deemed to be a sale under Article 366(29A) of the Constitution of India and transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods is a declared service under clause (f) of section 66E . Transfer of right to use goods is a well-recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. For understanding the concept of transfer of right to use please refer to point no 5.6.1. A license to use software which does not involve the transfer of 'right to use' would neither be a transfer of title in goods nor a deemed sale of goods. Such an activity would fall in the ambit of definition of 'service' and also in the declared service category specified in clause (f) of section 66E. Therefore, if a pre-packaged or canned software is not sold but is transferred under a license to use such software, the terms and conditions of the license to use such software would have to be seen to come to the conclusion as to whether the license to use packaged software involves transfer of 'right to use' such software in the sense the phrase has been used in sub-clause (d) of article 366(29A) of the Constitution. (See point no 5.6.1). In case a license to use pre-packaged software imposes restrictions on the usage of such licenses, which interfere with the free enjoyment of the software, then such license would not result in transfer of right to use the software within the meaning of Clause 29(A) of Article 366 of the Constitution. Every condition imposed in this regard will not make it liable to service tax. The condition should be such as restraints the right to free enjoyment on the same lines as a person who has otherwise purchased goods is able to have. Any restriction of this kind on transfer of software so licensed would tantamount to such a restraint. Whether the license to use software is in the paper form or in electronic form makes no material difference to the transaction. However, the manner in which software is transferred makes material difference to the nature of transaction. If the software is put on the media like computer disks or even embedded on a computer before the sale the same would be treated as goods. If software or any programme contained is delivered online or is down loaded on the internet the same would not be treated as goods as software as the judgment of the Supreme Court in Tata Consultancy Service case is applicable only in case the pre-packaged software is put on a media before sale. Delivery of content online would also not amount to a transaction in goods as the content has not been put on a media before sale. Delivery of content online for consideration would, therefore, amount to provision of service. 6.4.5 In case contract is given for customized development of software and the customized software so developed is delivered to the client on media like a CD then would the transaction fall in this declared entry or would it be covered by the TCS Judgement? In such a case although the software is finally delivered in the form of goods, since the contract is essentially for design and development of software it would fall in the declared list entry. Such a transaction would be in the nature of composite transaction involving an element of provision of service, in as much as the contract is for design and development of software and also an element of transfer of title in goods, in as much as the property in CD containing the developed software is transferred to the client. However, the CD remains only a media to transmit or deliver the outcome of which is essentially and pre-dominantly a contract of service. Therefore, such a transaction would not be excluded from the ambit of the definition of 'service' as the transaction does not involve 'only' transfer of title in goods and dominant nature of the transaction is that of provision of service. 6.5 Activities in relation to delivery of goods on hire purchase or any system of payment by instalments 6.5.1 Is the delivery of goods on hire purchase of any system of payment by instalments taxable? No. The delivery of goods on hire purchase or any system of payment on instalment is not chargeable to service tax because as per Article 366(29A) of the Constitution of India such delivery of goods is deemed to be a sale of goods.(For guidance on this aspect please refer to point no. 2.7 of this Guidance Paper) However activities or services provided in relation to such delivery of goods are covered in this declared list entry. 6.5.2 What is the scope of the phrase 'delivery of goods on hire-purchase or any system of payment by instalments'? Section 2 of the Hire Purchase Act, 1972 defines a hire purchase agreement' as 'an agreement under which goods are let out on hire and under which the hirer has the option to purchase them in accordance with the terms of the agreement and includes an agreement under which- ( i ) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments, and ( ii ) the property in the goods is to pass to such person on the payment of the last of such instalments, and ( iii ) such person has a right to terminate the agreement at any time before the property so passes.' As per the Sales of Goods Act by Mulla (Seventh Edition. Page 14) delivery is 'voluntary dispossession in favour of another' and that 'in all cases the essence of delivery is that the deliverer, by some apt and manifest act, puts the deliveree in the same position of control over thing, either directly or through a custodian, which he held himself immediately before the act'. The nature of such arrangements has been explained by the Supreme Court in the case of Association of Leasing Financial Service Companies v. Union Of India [2010 (10) TMI 4 (SC)] . The relevant extract in para 20 of the said judgment is reproduced below: 20. According to Sale of Goods Act by Mulla [6th Edition] a common method of selling goods is by means of an agreement commonly known as a hire-purchase agreement which is more aptly described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments. Key ingredients of the deemed sale category of 'delivery of goods on hire-purchase or any system of payment by instalments', therefore are- Transfer of possession (and not just of custody) The hirer has the option or obligation to purchase the goods in accordance with the terms of the agreement. 6.5.3 What is the difference between a normal hiring agreement and a hire-purchase agreement? In a mere hiring agreement the hirer has no option to purchase the goods hired and the risks and rewards incidental to ownership of goods remain with the owner and are not transferred to the hirer. In a hire-purchase agreement the hirer has an option or an obligation to purchase goods. 6.5.4 Are 'finance leases', 'operating leases' and 'capital leases' covered as 'delivery of goods on hire purchase or any system of payment of instalments'? Such leases would be covered only if the terms and conditions of such leases have the ingredients as explained above. Normally in an 'operating lease' the lease is for a term shorter than property's useful life and the lessor is typically responsible for taxes and other expenses on the property. The lessee does not have an option to purchase the property at the end of the period of lease. Such arrangements do not qualify as 'delivery of goods on hire purchase or any system of payment of instalments'. On the other hand 'financial leases' or 'capital leases' strongly resemble security arrangements and are entered into for financing the asset. The lessee pays maintenance costs and taxes and has the option of purchasing the lease end. Such arrangements resemble a hire-purchase agreement and would fall under the said 'deemed sale' category. The essence of this deemed sale category is that the arrangement under which the goods are 'delivered' should be in the nature of a financing arrangement wherein the lessee pays maintenance costs and taxes and has the option of purchasing the asset so delivered at lease end. It may, however, be pointed out that in case an 'operating lease' has elements of transfer of 'right to use' then the same would be covered in the other 'deemed sale' category pertaining to 'transfer of right to use any goods' 6.5.5 If delivery of goods on hire purchase or any system of payment on installment is deemed to be sale of goods what are the activities in relation to such delivery which are covered in the declared service? It has been held by Supreme court in the case of Association of Leasing Financial Service Companies v. Union of India [2010 (10) TMI 4 (SC)] that in equipment leasing/hire-purchase agreements there are two different and distinct transactions, viz., the financing transaction and the equipment leasing/hire-purchase transaction and that the financing transaction, consideration for which was represented by way of interest or other charges like lease management fee, processing fee, documentation charges and administrative fees, which is chargeable to service tax. Therefore, such financial services that accompany a hire-purchase agreement fall in the ambit of this entry of declared services. 6.5.6 Is service tax leviable on the entire quantum of interest and other charges received in relation to a hire purchase? No. In terms of the exemption notification relating to such activities, service tax is leviable only on 10% of the amount representing interest plus other charges explicitly charged as mentioned above. 6.6 Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods 6.6.1 What is the meaning and scope of the phrase 'transfer of right to use such goods' Transfer of right to use goods is a well recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. Transfer of right of goods' involves transfer of possession and effective control over such goods in terms of the judgment of the Supreme Court in the case of State of Andhra Pradesh v. Rashtriyalspat Nigam Ltd [Judgment dated 6/2/2002 in Civil Appeal no. 31 of 1991]. Transfer of custody along with permission to use or enjoy such goods, per se, does not lead to transfer of possession and effective control. The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited v. Union of India [2006 (3) TMI 1 (SC)] to determine whether a transaction involves transfer of right to use goods, which has been followed by the Supreme Court and various High Courts, is as follows: There must be goods available for delivery; There must be a consensus ad idem as to the identity of the goods; The transferee should have legal right to use the goods - consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee; For the period during which the transferee has such legal right, it has to be the exclusion to the transferor - this is the necessary concomitant of the plain language of the statute, viz., a 'transfer of the right to use' and not merely a license to use the goods; Having transferred, the owner cannot again transfer the same right to others. Whether a transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole, to determine the nature of the transaction. 6.6.2 Whether the transactions listed in column 1 of the table below involve transfer of right to use goods? S.No. Nature of transaction Whether transaction involves transfer of right to use 1 A car is given in hire by a person to a company along with a driver on payment of charges on per month/mileage basis Right to use is not transferred as the car owner retains the permissions and licenses relating to the cab. Therefore possession and effective control remains with the owner (Delhi High Court Judgment in the case of International Travel House in Sales Tax Appeal no 10/2009 refers). The service is, therefore covered in the declared list entry. 2 Supply of equipment like excavators, wheel loaders, dump trucks, cranes, etc for use in a particular project where the person to whom such equipment is supplied is subject to such terms and conditions in the contract relating to the manner of use of such equipment, return of such equipment after a specified time, maintenance and upkeep of such equipment. The transaction will not involve transfer of right to use such equipment as in terms of the agreement the possession and effective control over such equipment has not been transferred even though the custody may have been transferred along with permission to use such equipment. The receiver is not free to use such equipment in any manner as he likes and conditions have been imposed on use and control of such equipment. 3. Hiring of bank lockers The transaction does not involve the right to use goods as possession of the lockers is not transferred to the hirer even though the contents of the locker would be in the possession of the hirer.(refer to Andhra Pradesh High Court Judgment in the case of State Bank of India Vs State of Andhra Pradesh) 4. Hiring out of vehicles where it is the responsibility of the owner to abide by all the laws relating to motor vehicles No transfer of right to use goods as effective control and possession is not transferred ( Allahabad High Court judgement in Ahuja Goods Agency vs State of UP [(1997)106STC540] refers) 5 Hiring of audio visual equipment where risk is of the owner No transfer of right to use goods as effective control and possession is not transferred Note: The list in the table above is only illustrative to demonstrate how courts have interpreted terms and conditions of various types of contracts to see if a transaction involve transfer of right to use goods. The nature of each transaction has to be examined in totality keeping in view all the terms and conditions of an agreement relating to such transaction. 6.7 Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act In terms of this entry the following activities if carried out by a person for another for consideration would be treated as provision of service. Agreeing to the obligation to refrain from an act. Agreeing to the obligation to tolerate an act or a situation. Agreeing to the obligation to do an act. 6.7.1 Would non-compete agreements be considered a provision of service? Yes. By virtue of a non-compete agreement one party agrees, for consideration, not to compete with the other in any specified products, services, geographical location or in any other manner. Such action on the part of one person is also an activity for consideration and will be covered by the declared services. 6.8 Service portion in execution of a works contract Works contract has been defined in section 65B of the Act as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immoveable property or for carrying out any other similar activity or a part thereof in relation to such property. Typically every works contract involves an element of sale of goods and provision of service. In terms of Article 366 (29A) of the Constitution of India transfer of property in goods involved in execution of works contract is deemed to be a sale of such goods. It is a well settled position of law, declared by the Supreme Court in BSNL's case [2006 (3) TMI 1 (SC)] , that a works contract can be segregated into a contract of sale of goods and contract of provision of service. This declared list entry has been incorporated to capture this position of law in simple terms. It may be pointed out that prior to insertion of clause (29A) in article 366 of the Constitution defining certain categories of transactions as 'deemed sale of goods the position of law, as declared by the Supreme Court in Gannon Dunkerley's case (AIR1958SC560) was that a works contract was essentially a contract of service and no sales tax could be levied on goods transferred in the course of execution of works contract. It is only after the constitutional amendment that VAT or sales tax is leviable on such goods. The remaining portion of the contract remains a contract for provision of service. Further, with a view to bring certainty and simplicity, the manner of determining the value of service portion in works contracts has been given in rule 2A of the Valuation Rules. For details on valuation please refer to point no. 8.2 of this Guide. 6.8.1 Would labour contracts in relation to a building or structure treated as a works contract? No. Labour Contracts do not fall in the definition of works contract. It is necessary that there should be transfer of property in goods involved in the execution of such contract which is leviable to tax as sale of goods. Pure labour contracts are therefore not works contracts and would be leviable to service tax like any other service and on full value. 6.8.2 Would contracts for repair or maintenance of motor vehicles be treated as 'works contracts'? If so, how would the value be determined for ascertaining the value portion of service involved in execution of such a works contract? Yes. Contracts for repair or maintenance of moveable properties are also works contracts if property in goods is transferred in the course of execution of such a contract. Service Tax has to be paid in the service portion of such a contract. 6.8.3 Would contracts for construction of a pipe line or conduit be covered under works contract? Yes. As pipeline or conduits are structures on land contracts for construction of such structure would be covered under works contract. 6.8.4 Would contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract? Such contracts would be treated as works contracts if transfer of property in goods is involved in such a contract. 6.8.5. Would contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under 'works contract'? Yes, if such contracts involve provision of materials as well. 6.8.6 Is the definition of 'works contract' in clause (54) of section 65B in line with the definition of 'works contract' in various State VAT laws? The definition of 'works contract' in clause (54) of section 65B covers such contracts which involve transfer of property in goods and are for carrying out the activities specified in the said clause (54) in respect of both moveable and immoveable properties. This is broadly in consonance with the definition of 'works contract' in most of the State VAT laws. However, each State has defined 'works contracts' differently while dealing with works contract as a category of deemed sales. There could, therefore, be variations from State to State. For service tax purposes the definition in clause (54) of section 65B would be applicable. 6.8.7 What is the way to segregate service portion in execution of a works contract from the total contract or what is the manner of determination of value of service portion involved in execution of a works contract? For detailed discussion on this topic please refer to Guidance Note 8, in particular point no 8.2. 6.9 Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity 6.9.1 What are the activities covered in this declared list entry? The following activities are illustration of activities covered in this entry- Supply of food or drinks in a restaurant; Supply of foods and drinks by an outdoor caterer. In terms of article 366(29A) of the Constitution of India supply of any goods, being food or any other article of human consumption or any drink (whether or not intoxicating) in any manner as part of a service for cash, deferred payment or other valuable consideration is deemed to be a sale of such goods. Such a service therefore cannot be treated as service to the extent of the value of goods so supplied. The remaining portion however constitutes a service. It is a well settled position of law, declared by the Supreme Court in BSNL's case [2006 (3) TMI 1 (SC)] , that such a contract involving service along with supply of such goods can be dissected into a contract of sale of goods and contract of provision of service. This declared list entry is has been incorporated to capture this position of law in simple terms. 6.9.2 Are services provided by any kind of restaurant, big or small, covered in this entry? Yes. Although services provided by any kind of restaurant are covered in this entry, the emphasis is to levy tax on services provided by only such restaurants where the service portion in the total supply is substantial and discernible. Thus the following category of restaurants are exempted - Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a license to serve alcoholic beverage. Below the threshold exemption. 6.9.3. How is the value of service portion to be determined? For detailed discussion on this topic please refer to Guidance Paper 8 and in particular point no 8.4.