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TMI BlogWhat is Service?X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above have been explained in the points below. 2.1 Activity 2.1.1 What does the word 'activity' signify? 'Activity' has not been defined in the Act. In terms of the common understanding of the word activity would include an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility etc. It is a term with very wide connotation. Activity could be active or passive and would also include forbearance to act. Agreeing to an obligation to refrain from an act or to tolerate an act or a situation has been specifically listed as a declared service under section 66E of the Act. 2.2 Consideration 2.2.1 The phrase 'consideration' has not been defined in the Act. What is, therefore, the meaning of 'consideration'? As per Explanation (a) to section 67 of the Act consideration includes any amount that is payable for the taxable services provided or to be provided. Since this definition is inclusive it will not be out of place to refer to the definition of 'consideration' as given in section 2 (d) of the Indian Contract Act, 1872 as follows- When, at the desire of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olerating an act or a situation in return for provision of a service Doing or agreeing to do an act in return for provision of service Illustrations If And in return... A agrees to dry clean B's clothes B agrees to click A's photograph A agrees not to open dry clean shop in B's neighborhood B agrees not to open photography shop in A's neighborhood A agrees to design B's house B agrees not to object to construction of A's house in his neighborhood A agrees to construct 3 flats for B on land owned by B B agrees to provide one flat to A without any monetary consideration Then For the services provided by A to B, the acts of B specified in 2nd column are non- monetary consideration provided by B to A. Conversely, for services provided by B to A, similar reasoning will be adopted. 2.2.5 Is the value of non-monetary consideration important? Yes. The non-monetary consideration also needs to be valued for determining the tax payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor have they engaged him for his services. On the other hand if the same person is called to perform on payment of an amount of money then the performance becomes an activity for a consideration. Provisions of free tourism information, access to free channels on TV and a large number of governmental activities for citizens are some of the examples of activities without consideration. Similarly there could be cases of payments without an activity though they cannot be put in words as being consideration without an activity . Consideration itself pre-supposes a certain level of reciprocity. Thus grant of pocket money, a gift or reward (which has not been given in terms of reciprocity), amount paid as alimony for divorce would be examples in this category. However a reward given for an activity performed explicitly on the understanding that the winner will receive the specified amount in reciprocity for a service to be rendered by the winner would be a consideration for such service. Thus amount paid in cases where people at large are invited to contribute to open software development (e.g. Linux) and getting an amount if their contribution is finally accepted will be examples ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration charged for service then such interest would form part of gross amount received for the service. Also security deposit should not be in lieu of advance payment for the service. 6. Security deposits forfeited for damages done by service receiver in the course of receiving a service If the forfeited deposits relate to accidental damages due to unforeseen actions not relatable to provision of service then such forfeited deposits. would not be consideration in terms of clause (vi) of sub-rule (2) of rule 6 of the Valuation rule. 7. Excess payment made as a result of a mistake If returned it is not consideration If not returned and retained by the service provider it becomes a part of the taxable value. 8. Demurrages payable for use of services beyond the period initially agreed upon e.g. retention of containers beyond the normal period. This will be consideration and is covered by clause (x) of sub -rule (1) to Rule 6 of the Valuation Rules. 2.3.3 Can a consideration for service be paid by a person other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the JV/AOP and as otherwise admissible under Cenvat Rules. 2.4.4 Who is a 'person'? Is it only a natural person or includes an artificial or a juridical person? 'Person' is not restricted to natural person. 'Person' has been defined Section 65 B of the Act. The following shall be considered as persons for the purposes of the Act: an individual a Hindu undivided family a company a society a limited liability partnership a firm an association or body of individuals, whether incorporated or not Government a local authority, or every artificial juridical person, not falling within any of the preceding sub-clauses. 2.4.5 Are Government and local authorities also liable to pay tax? Yes. However, most of the services provided by the Government or local authorities are in the negative list. 2.4.6 What is the rationale behind taxing certain activities of the Government or local authorities? Only those activities of Government or local authorities are taxed where similar or substitutable services are provided by private entities. The rationale is as follows- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Constitution A Municipality as referred to in clause (e) of article 243P of the Constitution A Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund A Cantonment Board as defined in section 3 of the Cantonments Act, 2006 A regional council or a district council constituted under the Sixth Schedule to the Constitution A development board constituted under article 371 of the Constitution, or A regional council constituted under article 371A of the Constitution. 2.4.9 Are all local bodies constituted by a State or Central Law local authorities? No. The definition of 'local authority' is very specific as explained in point no 2.4.8 above and only those bodies which fall in the definition comprise 'local authorities'. It would not include other bodies which are merely described as a local body by virtue of a local law. However it may be noted that services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243W of the Constitution a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment department or vice versa or a by a State to another State Government or by a Government to an autonomous body, the same would be taxable if such service does not fall in the negative list. It is another matter that most of the services provided by the Government are in the negative list. For details please refer to point no. 4.1 of this Guide. 2.4.12 Would taxable services provided by Government or local authorities still be liable to tax if they are covered under any other head of the negative list or are otherwise exempted? No. For example, transport services provided by Government to passengers by way of a stage carriage would not be taxable as transport of passengers by stage carriage has separately been specified in the negative list of services. The specified services provided by the Government or local authorities are taxable only to the extent they are not covered elsewhere i.e. either in the negative list or in the exemptions. 2.5 Activities specified in the declared list are services. Declared Services are activities that have been specified in Section 66 E of the Act. When such activities are carried out by one person for another in the taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be assessed independently. In other words the discernible portion of the transaction which constitutes, let's say, a transfer of title in goods, would be excluded from the definition of service by operation of the said exclusion clause while the service portion would be included in the definition of service. For example a builder carrying out an activity for a client wherein a flat is constructed by the builder for the client for which payments are received in installments and on completion of the construction the title in the flat is transferred to the client involves two elements namely provision of construction service and transfer of title in immovable property. The two activities are discernibly separate. The activity of construction carried out by the builder would, therefore, be a service and the activity of transfer of title in the flat would be outside the ambit of service. In cases of composite transactions, i.e. transactions involving an element of provision of service and an element of transfer of title in goods in which various elements are so inextricably linked that they essentially form one composite transaction then the nature of such transaction would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les enunciated in Gannon Dunkerley's case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be - did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test. The following principles emerge from the said judgment for ascertaining the taxability of composite transactions- Except in cases of works contracts or catering contracts [exact words in article 366(29A) being - 'service wherein goods, being food or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods and materials sold (emphasis supplied) by the service provider to the service recipient subject to condition that there is documentary proof of such value of goods and materials. This was necessary under the regime of taxation of services based on specified descriptions as some of the specified descriptions could include an element of transfer of title in goods. On the other hand, under the negative list scheme, specified descriptions of taxable services have been done away with and transactions that involve transfer of title in goods or are 'deemed to be sale of goods' under the Constitution are excluded from the ambit of service by the very definition of service. Therefore if, in the course of providing a service, goods are also being sold by a service provider for which there is such documentary proof as to make the sale a distinct and a separate transaction then the activity of sale of such goods gets excluded from the definition of service itself. The essence and intent of notification no 12/2003 has, therefore, been fully captured in the definition of service itself. 2.6.5 Will the goods portion in transactions like annual maintenance contracts or erec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities; Such other instruments as may be declared by the Central Government to be securities. Rights or interest in securities. 2.6.7 What are the implications of inclusion of 'securities' as 'goods'? The definition of 'goods' has essentially been borrowed from the Sale of Goods Act, 1930 with the only variation that in the inclusion clause of the said definition the phrase 'stocks and shares' been replaced with 'securities'. In effect, therefore, activities that are in the nature of only transfer of title by way of sale, redemption, purchase or acquisition of securities on principal-to-principal basis, excluding services of dealers, brokers or agents in relation to such transactions, are outside the ambit of 'services. However activities which are not in the nature of transfer of title in securities (for example a person agreeing not to exercise his right in a security for a given period of time for a consideration) would not be included in this exclusion clause to the definition of 'service. 2.6.8 What is a derivative? As per in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be leviable on such entry and exit loads. Service tax would also be leviable on fund management activity undertaken by an asset management company (AMC) for which an AMC charges the mutual fund an 'investment and advisory fee', in accordance with provisions contained in the SEBI regulation. 2.6.11 What is the meaning of 'immoveable property'? 'Immoveable property' has not been defined in the Act. Therefore, the definition of 'immoveable property as given in clause (26) of the General Clauses Act, 1897 has to be taken as per which immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. 2.7 Activity to be taxable should not constitute merely a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution. 2.7.1 What are 'deemed sales' defined in article 366(29A)? The six categories of deemed sales as defined in article 366(29A) of the Constitution are - transfer, otherwise than in pursuance of a contract, of property in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified category of deemed sales. The declared list entry in clause (f) of section 66E specifies transfer of goods by way of hiring, leasing or licensing or in any such manner without involving transfer of right to use goods as a declared service. Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration is a deemed sale of goods. Such supply takes place in restaurants or in catering. On the other hand clause (i) of section 66E restricts the declared service to service portion in an activity where such supply of food or drinks takes place. It is thus evident that the activities specified as declared services in section 66E do not encroach upon the area of deemed sales. In fact most of the declared services have been specified with the intent of clarifying the distinction between deemed sales and activities related thereto which are outside the realm of deemed sales but qualify as a service. 2.8 Transactions only in money or actionable claims do n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged. The implications of this explanation are that while mere transactions in money are outside the ambit of service, any activity related to a transaction in money by way of its use or conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination would not be treated as a transaction in money if a separate consideration is charged for such an activity. While the transaction in money, per-se, would be outside the ambit of service the related activity, for which a separate consideration is charged, would not be treated as a transaction of money and would be chargeable to service tax if other elements of taxability are present. For example a foreign exchange dealer while exchanging one currency for another also charges a commission (often inbuilt in the difference between the purchase price and selling price of forex). The activity of exchange of currency, per-se, would be a transaction only in money, the related activity of providing the services of conversion of forex, documentation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of a consideration for a taxable service, e.g. a hiring fees or a license fee accruing on hiring or licensing of a moveable property. In such a situation the service being provided in relation to such moveable property would not be covered in the exclusion clause. It is only if the beneficial interest in such property is transferred to another person for a consideration that the activity of transferring the beneficial interest would be covered. 2.8.11 Would vouchers that entitle a person to enjoy a service, for example a health club, be an actionable claim? No. Such a voucher does not create a 'beneficial interest' in a moveable property but only entitles a person to enjoy a particular service for a single or specified number of times. 2.8.12 Would recharge vouchers issued by service companies for enabling clients/consumers to avail services like mobile phone communication, satellite TV broadcasts, DTH broadcasts etc be 'actionable claims? No. Such recharge vouchers do not create a 'beneficial interest' in a moveable property but only enable a person to enjoy a particular service. 2.9 Provision of service by an employee to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations to the definition of 'service' Explanation 1 clarifies that 'service' does not cover functions or duties performed by Members of Parliament, State Legislatures, Panchayat, Municipalities or any other local authority, any person who holds any post in pursuance of the provisions of the Constitution or any person as a Chairperson or a Member or a Director in a body established by the Central or State Governments or local authority and who is not deemed as an employee. Explanation 2 clarifies that transaction in money does not include any activity in relation to money by way of its use or conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged.' (please refer to point no 2.8.5 for further guidance on this) Explanation 3 creates two exceptions, by way of a deeming provision, to the general rule that only services provided by a person to another are taxable. As per these deeming provisions establishment of a person located in taxable territory and establishment of such person located in non-taxable territory are deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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