Classification - Principles of Interpretation of Specified Description of Services or Bundled Services - Service Tax Practice Manual / Ready Reckoner - Service Tax

Principles of Interpretation of Specified Description of Services or Bundled Services w.e.f. 1.7.2012 Introduction Section 65A was been inserted by the Finance Act, 2002 with effect from 14-05-2003 has been withdrawn w.e.f. 1.7.2012. As such before insertion of this section, there was no provision addressing the manner of classification in case of difficulty and further after introduction of negative list concept the provisions of this section were not required and therefore withdrawn. However, Section 66F has been introduced vide Finance Act, 2012 w.e.f. 1.7.2012 for the Principles of Interpretation of Specified Descriptions of Services or Bundled Services. . Input service and output service may not be same (1) Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service. [ Illustration - The services by the Reserve Bank of India, being the main service within the meaning of clause (b) of section 66D, does not include any agency service provided or agreed to be provided by any bank to the Reserve Bank of India. Such agency service, being input service, used by the Reserve Bank of India for providing the main service, for which the consideration by way of fee or commission or any other amount is received by the agent bank, does not get excluded from the levy of service tax by virtue of inclusion of the main service in clause (b) of the negative list in section 66D and hence, such service is leviable to service tax.] ( Inserted vide THE FINANCE ACT, 2015 w.e.f. 14th May 2015) Specific description prevail over general description (2) Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description. Determination of bundled services (3) Subject to the provisions of sub-section (2), the taxability of a bundled service shall be determined in the following manner, namely:-- (a) if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character; (b) if various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax. Explanation . - for the purposes of sub-section (3), the expression bundled service means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. Manner of determining whether services are naturally bundled Also explained by CBEC , no single formula can be formulated whether a service is naturally bundled in the ordinary course of business or not. Each case has to be individually examined. As per various judgements, principles for determination of essential characteristic of a product have: -Cost of components of the product (refer case Xerox India Ltd. vs CC 2010 (11) TMI 20 - Supreme Court of India ) -Functionality of the product. (refer case CCE, Hyderabad v. Bakelite Hylam Ltd. 1997 (3) TMI 598 - SUPREME COURT ) ========== Guidance Note 9 of Education Guide by CBEC- Rules of Interpretation Despite doing away with the service-specific descriptions, there will be some descriptions where some differential treatment will be available to a service or a class of services. Section 66F lays down the principles of interpretation of specified descriptions of services and bundled services. These are explained in paras below- 9.1 Principles for interpretation of specified descriptions of services Although the negative list approach largely obviates the need for descriptions of services, such descriptions continue to exist in the following areas - In the negative list of services. In the declared list of services. In exemption notifications. In the Place of Provision of Service Rules, 2012 In a few other rules and notifications e.g. Cenvat Credit Rules, 2004 . There are two principles laid down which are contained in clauses (1) and (2) of section 66F of the Act. 9.1.1 What is the scope of the clause (1) of section 66F: 'Unless otherwise specified, reference to a service (hereinafter referred to as the main service ) shall not include reference to a service which is used for providing the main service' This rule can be best understood with a below illustration - 'Provision of access to any road or bridge on payment of toll' is a specified entry in the negative list in section 66D of the Act . Any service provided in relation to collection of tolls or for security of a toll road would be in the nature of service used for providing such specified service and will not be entitled to the benefit of the negative list entry. 9.1.2 What is the scope of clause (1) of section 66F : 'where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description'. This rule can also be best understood with below illustrations - The services provided by a real estate agent are in the nature of intermediary services relating to immovable property. As per the Place of Provision of Service Rule, 2012, the place of provision of services provided in relation to immovable property is the location of the immovable property. However in terms of the Rule 5 pertaining to services provided by an intermediary the place of provision of service is where the intermediary is located. Since Rule 5 provides a specific description of 'estate agent', the same shall prevail. 9.2Taxability of 'bundled services'. 'Bundled service' means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of 'bundled service' would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different. Two rules have been prescribed for determining the taxability of such services in clause (3) of section 66F of the Act . These rules, which are explained below, are subject to the provisions of the rule contained in sub section (2) of section 66F , viz a specific description will be preferred over a general description as explained in para 7.1.2 above. 9.2.1 Services which are naturally bundled in the ordinary course of business The rule is - 'If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character' Illustrations - A hotel) provides a 4-D/3-N package with the facility of breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation. 9.2.2 Services which are not naturally bundled in the ordinary course of business The rule is - 'If various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall be treated as provision of a service which attracts the highest amount of service tax.' Illustrations - A house is given on rent one floor of which is to be used as residence and the other for housing a printing press. Such renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore, if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of service tax. In this case renting for use as residence is a negative list service while renting for non-residence use is chargeable to tax. Since the latter category attracts highest liability of service tax amongst the two services bundled together, the entire bundle would be treated as renting of commercial property.