taxability of the service of sub - contractor when main contractor's service is exempted, Service Tax

[N R CONSULTING N R CONSULTING]

A private limited Company has received a contract from MCD for collection and deposition of municipal solid waste which is exempted under service tax. The company sub - contracts the entire service of collection and deposition of municipal solid waste to a sub-contractor. Whether the service of the sub-contractor is exempted. Kindly support reply with provisions / case laws.

Posts / Replies

[vasudevan unnikrishnan]

Pl. see the clauses on 'Bundled services'.So long as the service is the same and the re is exemption ,there will not be liability for sub contractors providing same service.,as clarified in the 'education guide'.

[N R CONSULTING N R CONSULTING]

I have seen the clause under bundled services. But bundled services are different. sub contractors are not likely to fall under that category. Pt no.29 of "exemtions under mega notification  no. 25/2012" dated 20/06/2012, covers sub contractors under works contract. Can this broadly relate to all other contracts which are not works contracts ?

[Vijay Chitte]

If, the main contractor providing exempt service, and for that appoint sub contractor then sub controctor is not exempt from service tax. Please refer Guidance note 7.11.11  page no.105.

[N R CONSULTING N R CONSULTING]

Guidance note pt. no. 7.11.11 , speaks exclusively on works contract. Pls see the services mentioned there are contruction services. The act has till now remained silent on all other contracts except works contract. Moreover, Pt. no. 7.11.11 clarifies that all back to back sub contracts will be exempt but outsourced services under works contract will not be exempt.

[LALIT MUNOYAT]

1) The services of the sub contractor as mentioned by you, are not services of Works Contract. If you read the definition of Works Contract you will find that "works contract" means 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 immovable property or for carrying out any other similar activity or a part thereof in relation to such property. The essence of the definition is that there must a transfer of property, movable or immovable. In your case there is no transfer of property and therefore you are not covered by Works Contract Service.

2) It has to be appreciated that the wordings used in the exemption are ‘services by way of construction of roads etc’ and not ‘services in relation to construction of roads etc’. It is thus apparent that just because the main contractor is providing the service by way of construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc., it would not automatically lead to the classification of services being provided by the sub-contractor to the contractor as an exempt service. Now read the definition of Support Services :

3) "Support Services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in 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 immovable property, security, testing and analysis.

4) It therefore appears that the main contractor has outsourced his activities to you and therefore you are covered by “Support Service” which are Taxable by definition itself and as per rules of Interpretation stated above.

By CA Lalit Munoyat

[vasudevan unnikrishnan]

The original querry is on the service of' collection  and deposition of municipal  solid waste and the same being sub-contracted. Here the same service is being sub contracted.

In para 7.11.11, the exemption example discussed is different services-viz.architect ,consulting engineer service etc. sub contracted in relation to the main service viz.onstruction of roads etc covered by mega exemption. Since the services are distinctly different,(though in relation to of course),the  bundled service rules would apply.Thus when one is exempted and other taxable, the bundled service would be taxable. This must be the rationale for clause 7.11.11.

sl. no 29 of mega exemption would apply to all 'works contract services',

Pl. note that not only the cocnstruction services are covered under WCS,as was hitherto.

[LALIT MUNOYAT]

The concept of bundled service is not applicable in this case. It applies only to cases wherein more than one services are provided by the same service provider. In this case the main contractor and the sub contractor are not  providing more than one class of service. The service of the sub contractor can't be bundled with the services of the main contractor because the services are being provided by different Providers. Example in the Guidance Note

 

A 5 star hotel is booked for a conference of 100 delegates on a lump sum package with the following facilities:

 1) Accommodation for the delegates

2)  Breakfast for the delegates,

3)  Tea and coffee during conference

 4) Access to fitness room for the delegates

  5) Availability of conference room

 6) Business centre

As is evident a bouquet of services is being provided, many of them chargeable to different effective rates of tax. None of the individual constituents are able to provide the essential Availability of conference room character of the service. However, if the service is described as convention service it is able to capture the entire essence of the package. Thus the service may be judged as convention Business centre service and chargeable to full rate. However it will be fully justifiable for the hotel to charge individually for the services as long as there is no attempt to offload the value of one service on to another service that is chargeable at a concessional rate.

In this case all of the above services are provided by the same Hotel and each service qualifies for different classification. But this being a case of Bundled Service, the same is taxable under single head Business centre service

[N R CONSULTING N R CONSULTING]

Meaning of “Services provided to Government, a local authority or a governmental authority”

The Exemption notification uses the term Services provided to Government, a local authority or a governmental authority”. The notification does not use the words ‘Directly provided to Government, a local authority or a governmental authority’. Thus, even if the service is provided by sub-contractor, ultimately it is ‘provided to Government, a local authority or a governmental authority.

Recently, CBE&C, vide its circular No. 138/7/2011-ST dated 6-5-2011, has clarified that a sub-contractor is liable even if main contractor is exempt from service tax, if the service provided by sub-contractor falls in a category where the service is not exempt from service tax . But in the above given case, the nature of service of the sub contractor is same as the main contractor i.e. “management of municipal solid waste”.

Under Service tax, the word “contract” or “sub – contract” has always been used to mean works contract and not any other contract other than works contract.  The term should be broadened to understand the intention of the statute.

 Rule of Purposive Construction

The rule of purposive construction states that interpretation of statute should be done having regard to the purpose of the Statute. An eminent jurist of UK (Late) Lord Denning had observed – ‘It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning'

The rule is also applicable in case of “management of municipal solid waste” services provided to Government, a local authority or a governmental authority.

The negative list of services exempts all services rendered by a government or a local body excepts the following:

(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government;

(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

(iii) transport of goods or passengers; or

(iv) support services, other than services covered under clauses (i) to (iii) above, provided

to business entities.

Thus in order to avoid ambiguity such services like “management of municipal solid waste” is always exempted whether it is rendered by the local authority itself or someone else on its behalf. Service Tax is levied on the nature of service and not on the nature of contract. Even if the service is rendered by the sub – contractor / agent of main contractor, the nature of service i.e “management of municipal solid waste” does not change. The category of service rendered is to be considered and not the category of the person who renders the service.

[LALIT MUNOYAT]

The crux of the issue lies on the interpretation of the entries in the Exempt List. Extending the logic further, if the sub-contractor also sub contracts some part of his sub contract to another sub contractor who again sub contracts some part of it to another sub contractor and such chain extends further down, does it mean all the sub contractors, (may be 5 or 7 or any number) would also be exempt just because they are also engaged in providing the service of management of municipal solid waste. The non use of word “ Direct” does not have any significance in interpretation of the Exempt Entries. If that be the case then almost all the entries would cover some other services which have a relation to the main service and thus also be exempt. This definitely is not the intention of the Legislation.

If one reads the notification harmoniously with the provisions of the Finance Act 2012, then he will find clear answer to the issue.  The provisions are as under:

Principles of interpretation of specified descriptions of services or bundled services. w.e.f. 1.7.2012

66F. (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. It clearly provides that  a reference to a service by nature or description in the Act will not include reference to a service used for providing such service. Therefore, if any person is providing services, in respect of projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc., such as architect service, consulting engineer service ., which are used by the contractor in relation to such construction, the benefit of the specified entries in the mega-exemption would not be available to such persons unless the activities carried out by the sub-contractor independently and by itself falls in the ambit of the exemption

This rule can be best understood with a few illustrations:

• ‘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.

• Transportation of goods on an inland waterway is a specified entry in the negative list in section 66D of the Act. Services provided by an agent to book such transportation of goods on inland waterways or to facilitate such transportation would not be entitled to the negative list entry.

Next, the use of the word “Direct” is discernible from the words used in the description of the Entries itself. It has a direct reference to the words “Services Provided by Way of” and not “services provided in relation to” . In the present case the entry 25 –Solid Waste Management- uses the word services provided by Way of Solid Waste Management and not “Services provided in relation to  Solid Waste Management . Had it been the intention to exempt sub contractor providing the services of solid waste management, then the words “Services provided in relation to” would have been usedand in that casemany more services provided in relation to solid waste management would have got the benefit of the exemption.

The circular No. 138/7/2011-ST dated 6-5-2011, supports my view as it states that a sub-contractor is liable even if main contractor is exempt from service tax, if the service provided by sub-contractor falls in a category where the service is not exempt from service tax . In the present case the services are provided in relation to solid waste management and therefore not exempt by Rules of interpretation u/s 66F(1). The addition of the phrase “The nature of service of the sub contractor is same as the main contractor i.e. “management of municipal solid waste” is not used in the circular. In any case this circular may not have much relevance under Negative List taxation system as the present system of Negative List is entirely different from the Positive List System under which the said circular was issued.

Therefore the services of sub contractor in this case are not exempt but taxable under the caption “ Support Service” provided by out sourcing of the main service.

 CA Lalit Munoyat

[N R CONSULTING N R CONSULTING]

Somehow, “ Support Service” provided by out sourcing of the main service", does not seem suitable to me in this case. Definition of outsourcing: "Outsourcing" refers to sending a piece of work partially or fully to some "external" agency who specialises in the same. For example, a small firm (say, "A") may not find itself comfortable in managing its accounts, so may outsource it to a specialised accounting firm (say, "B"). Now this firm "B", to further reduce its cost or for any other reason, may further give it - partially or fully - to another firm (say, "C"). This is "subcontracting" . In this case actually MCD is outsourcing the main service to the Private Limited Company who is sub contracting the entire service to the sub contractor.

[LALIT MUNOYAT]

There are many more definitions of outsourcing and such other definitions treat outsourcing as equal to subcontracting. In one such definition outsourcing is defined as including

1) contracting with outside sources, 2) disposing of, 3) eliminating work,4) eliminating workers, 5) going outside, 6) hiring outside sources, 7) retaining others, 8) retaining outside sources,9)  subcontracting

In this case MCD is duty bound to discharge its compulsory duty to the General Public levied on a Municipality as referred to in clause (e) of article 243P of the Constitution. If MCD were to provide such services itself then this service would have been classified under Clause (a) of the Negative List.  Since MCD does not have necessary apparatus to carry out these duties it has outsourced the same to a Pvt. Ltd. Co. (PLC) and the PLC  is performing the duties of the MCD under a contract.

The PLC is not primarily duty bound to provide the services of Solid wastage management in lieu of the MCD except under the contract of outsourcing. By performing the duties of MCD, the PLC does not acquire the status of the MCD. If the PLC were to be treated as MCD, then the services by the PLC would have been put under clause (a) of the Negative List and the services of the subcontractor would have been exempt under entry-25 of the Exempt List. That is not the case herein. The further outsourcing by PLC to a subcontractor  is not in performance of any statutory duty levied on PLC. Rather it is in the performance  of business by the PLC and the subcontractor with each other. This being so, it can’t be said that the subcontractor is providing exempt service to PLC. Rather it is providing commercial services to the PLC. Partial or full outsourcing does not make any difference as the liability is only to the extent of portion of service outsourced.

I now conclude that subcontracting is included in the definition of outsourcing and that the services provided by the subcontractor to the PLC are commercial services and therefore NOT EXEMPT. This is my final stand.

Good bye

By CA Lalit Munoyat

 

[Bhishma Parikh]

if the activity carried out by a sub contractor is the service provided to the government or local civic body for public utility maintenance , then whether the same is taxabale.

[LALIT MUNOYAT]

The answer to your question is contained in the question itself. How can there be a Sub contractor without there being a principal contractor. If the sub contractor himself  is providing services to the government then he will be treated as a principal contractor  and not a sub contractor.