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TMI BlogCLASSIFICATION OF TAXABLE SERVICESX X X X Extracts X X X X X X X X Extracts X X X X ..... CLASSIFICATION OF TAXABLE SERVICES - By: - Dr. Sanjiv Agarwal - Service Tax - Dated:- 27-8-2008 - - There are over 105 taxable services and it is necessary for a service provider to classify the taxable service category in which he falls. This is required for various reasons. According to Section 65A of the Finance Act, 1994 , as inserted by Finance Act, 2003 w.e.f. 14th May, 2003, classification of services has to be done by the service provider on the basis of principles laid down thereunder. However, advance ruling can also be obtained by eligible persons to have a guidance on category of taxable service. Need for Classification With taxable services covered under service tax continuously increasing and the law still being not fully developed, there is considerable overlap in the definitions and scope of taxable services. At times, dispute arises on appropriate classification of services because of certain exemptions available to a class or classes of services and selective approach adopted by the Govenment for levy of service tax. This leads to the need for proper and judicious classification of taxable services. Certain doubts emerge regarding classification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of certain services which appear to fall under two or more categories simultaneously. Some instances where such problems have arisen relate to Management Consultants v. Manpower Recruitment Services , Mandap Keepers v. Convention Services , Rent-a-Cab Scheme v. Tour Operators , Cargo Handling Services v. Storage and Warehousing Services , Architect v. Interior Decorator , Scientific and Technical Consulting Services v. Consulting Engineer , Practicing Chartered Accountants v. Management Consultants , IPR v. Franchise Services , Maintenance Repairs v. Erection and Commissioning Services , Clearing Forwarding v. Commission Agent Services , Business Auxiliary Services v. Business Support Services , Business Exhibitions v. Event Management etc. CBEC had issued Circular No. 51/13/2002, dated 7-1-2003 ( since withdrawn) which clarified that any service (transaction) can be taxed only once, even if it appears to fall under two or more categories. Therefore, before levying service tax it is essential to determine under which category a particular service falls. It should be kept in mind that service tax is a tax on the service p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided and is recovered from the service provider (in some cases even from the service recipient). The position is akin to Central Excise duty which is charged on manufactured goods. Just as Central Excise duty can not be charged twice on the same goods under two separate chapters/headings/sub-headings of the Central Excise Tariff, so also Service tax cannot be charged twice on the same service (transactions). However, one service provider may provide more than one taxable service. In such cases, the service provider may obtain only one registration, but registration certificate shall be endorsed for all the taxable services and tax liability will have to be discharged for each of the taxable services separately. For services provider who provide a single or multiple services, it is imperative to identify or classify a particular service into its appropriate category for correct levy of service tax in terms of its scope, value, abatement etc. Moreover, classification of any service into the appropriate category is necessary for the following purposes — (a) Registration of service provider in appropriate category (b) Ascertaining the date of commencement of taxability (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Knowing the rate of applicable service tax (d) Claiming exemptions (e) Availing correct abatements. A wrong classification may deny a benefit or exemption to assessee. Also, due to wrong classification, a service may appear to fall under a taxable services where as that service may not be taxable at all Underlying Principles The basic principles of classification of a taxable service, which prima facie is classifiable in two or more services would be as follows: (i) Service which gives the most specific description of taxable service should be preferred over service providing a general description. (ii) In case of composite services where more than two services are provided and which cannot be classified as above, it should be classified in that category which gives it the essential character. (iii) In case service cannot be classified as above (i) or (ii), services should be classified under sub-clause of section 105 which appears first amongst there which require equal consideration on merits. Section 65A lays down the basic principles of classifying the taxable services. The classification is based on specific description or essential character of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 and arranged in alphabetical order. The taxable services 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. For example, there is a service which may fall under mandap keeper, market research, event management or convention service, it would be classified as mandap keeper service because it appears 'first' in sub-section (105) of section (65) . Service tax can 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. In any fiscal classification, the onus lies on the Department and the Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment has to prove on the basis of cogent evidence on records. Following case laws can be cited for this argument - (i) M/s. Sainet Private Ltd. Others v. UOI (1984) 18 ELT 141 ( Bombay High Court) (ii) CCE, Nagpur v. Vicco Laboratories (2005) 179 ELT 17 (Supreme Court) (iii) CCE, Calcutta v. Sharma Chemical Works (2003) 154 ELT 328 (Supreme Court) (iv) M/s. Hindustan Ferodo Ltd. v. CCE, Bombay (1997) 89 ELT 16 in (Supreme Court) (v) CCE, Bangalore v. Kashyap Engg. Metallurgical (P) Ltd. (1994) 71 ELT 530 (CESTAT) (vi) UOI v. Garware Nylon Ltd. (1996) 87 ELT 12 (Supreme Court) In Coal Handlers Pvt. Ltd. v. CCE Kolkata- 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 . 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 65A (2b) should be made only if taxable services becomes classifiable under tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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. In Prestige property management v. CST, Bangalore (2007) 11 STR 61, (2007) 8 STR 533 (2007) 11 STJ 112 (Cestat, Bangalore), it washeld that the composite scheme, even where it consists of more than one taxable service, should be treated as a single taxable service on the basis of main or principal service and it should be accordingly clarified. The Tribunal held that the appellants were rendering the major service of management of immoveable properties while security agency service was only a part of it. Also, such bifurcation could not be done. The major service done by the appellant is 'management of immovable properties'. The appellants have been filing return regularly. The Revenue initiated proceedings for recovery of service tax under the under the category of 'security agency'. The 'security agency service is a part of services done by them under 'propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y management services' in terms of the Board's Circulars. Such bifurcation cannot be done. In Dr. Lal Path Lab. Pvt. Ltd. v. CCE, Ludhiana (2006) 4 STR 527 (CESTAT, New Delhi); (2006) 7 STJ 56 , 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. Advance Ruling Under clause (a) of section 96C (2) , advance ruling may be sought for classification of any service but such a guidance or faculty cannot be availed by a resident Indian assessee. A question may be raised as to whether any service being rendered proposed to be provided satisfies the definition of any taxable service defined under section 65 and if so, what would be the category of taxable service as per section 65(105). In Google Online India (Pvt.) Ltd. (2006) 4 STJ 280 ( AAR ); AAR held that AAR has the jurisdiction for classification of taxable service under section 96C(2)(a) of the Finance Act, 1994 and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t therefore, proceeded with only classification of service. It also ruled that it can only rule about classification of service and not about taxability of the service or otherwise. Whether a service provided by an applicant would be a taxable service or not, cannot be a jurisdiction or subject matter of AAR to decide. It infact presupposed the taxability aspect. Departmental Clarifications According to Ministry of Finance's Letter No. 334/4/2006-TRU dated 28.02.2006 , following clarification has 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 so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me elements are taxable and others 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. For the sake of clarity and ease of classification by Finance Act, 2006, certain categories of services are clubbed together and a new service category created. Some of the newly specified services may also contain services which are presently covered under some of the existing 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 29.2.2008 , following clarification has been issued for appropriate clarification of taxable services - 3.1 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 dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent 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. 3.2 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. 3.3 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntaining 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. 3.4 Seven services are being separately defined as taxable services. Specifying a service separately as a taxable service does not necessarily mean or suggest that services falling within the scope of newly specified service were not earlier classifiable under any one of the existing taxable services. Grouping of services under a specific taxable service may change. The scope and coverage of a taxable service are to be determined strictly in accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with the language of the relevant statutory provision existing during the material period". Guiding principles for proper classification Following principles should be borne in mind while classifying a taxable service: (1) Clearly understand and interpret the statutory provisions ( i.e ., section 65 which prescribes definitions of various services, service providers and taxable services. (2) Try to identify the most appropriate and desirable taxable service which matches the description/character of your service. (3) Be guided by agreements/documentation and also accounting entries. (4) Base your decision on question of facts and law. (5) Both form of transaction or service and substance thereof are to be taken into account for making a decision. The real nature and substance of services and not merely the form should be the girding factor for classification. (6) Guiding principle is to identify the essential features of transaction. (7) As certain whether a services is a distinct and independent service or a component of overall service which is ancillary to the main service. (8) Where service contains both-principal service as well as ancillary ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice, classify the service based on essential features of the transaction. (9) For a combination of services (more than one but composite), go by the essential character of such combined service on merits. (10) Classify a single composite service under any one of the specified taxable services. (11) Method of charging does not in itself determine whether a service provided is a single service or a multiple service. (12) Scope of coverage of individual service should be interpreted strictly in accordance with the statutory provisions. (13) A composite service, even if it consists of more than one service, should be treated as a single service based on main or principle service and accordingly classified. (14) It will make no difference if the tax rates of the components are the same as that of the principle service. (15) It should be also be ensured that there is no double taxable and a service is taxed once only under most appropriate category. (16) Do not artificiality split a single service from economic point of view. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - tax ..... 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