In the
absence of any interpretative rules, it was very difficult at times to decide
the classification of a particular service. To set aside all doubts in this
regard, the Finance Act 2003 has introduced new section 65A in the Chapter V of
the Finance Act, 1994 to provide the manner of determination of classification
of taxable services. Earlier, the Central Board of Excise and Customs had also
issued Circular No. ST‑51/13/2002 [F. No. 178//2002‑CX.4], dated 7‑1‑2003
(appended as Annexure 1) regarding the classification of taxable services, the
same has also been discussed hereunder.
Service falling in multiple category and problem in
classification
The
Government has opted the piecemeal approach to levy service tax on services.
There are many services, which appear to be falling in more than one taxable
services. Some instances where such problems arise are 'steamer agent's
services' versus 'custom house agent's services', 'mandap keeper services'
versus ‘convention services', 'practising chartered accountant services' versus
‘management consultant's services'. Many times doubts have been raised
regarding the classification of certain services, where it appears to be
falling under two or more categories simultaneously. For instance, advice and
services in connection with the merger and acquisition rendered by a practising
chartered accountant to his client, whether this particular service falls under
the category of 'practising chartered accountants service' and or it will fall
under the category of 'management consultant's service'. There are many
services, which have been brought under the Service Tax net subsequently, but
had been classified by the Department/ Government under the other existing
taxable service. The Department/ Government has interpreted the definitions
differently with a view to widen the scope of taxable service, not to give the
true meaning. For instance, sometimes, 'annual maintenance contract' is treated
as service taxable in the category of 'consultant engineer's services' whereas
such service is brought under the service tax net by the Finance Act, 2003 in
the category of 'maintenance of repair services'. Similarly, the Board in its
Circular No. 49/11/2002‑ST, dated 18‑12‑2002 has clarified
that work of erection and commissioning of machineries and plants are in the
nature of 'technical assistance'. Therefore, it is falling under 'consultant
engineer's services' whereas such services i.e. commissioning and installation,
are specifically brought under the service tax net by the Finance Act, 2003 in
the category of 'commissioning or installation services'. The definitions of
many taxable services appear to be vague, ambiguous and absurd, which are
creating doubt.
Same services can be taxed twice under two different
categories
No. The
Board in its Circular No. ST‑51/13/2002 [F. No. 178/1/2002‑CX.4],
dated 7‑1‑2003 (appended as Annexure 1) 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. 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 can not be charged twice on the same service (transactions). Earlier also, while explaining the scope of service tax on 'convention services', the Government in the Circular F. No. B. 11//2001‑TRU, dated 9th July, 2001 (appended as Annexure I of Chapter on Convention Services' ante) has clarified that intention is not to charge the service tax twice on the same service.
Effect if service is not properly
classified
Where
assessee is not classifying the services rendered by him in proper category of
service, it will have the following effect
(a) Where service is wrongly
classified it may fall in the category which is not yet taxable or it may be
classified in taxable service though it is not taxable.
(b) Where service is wrongly
classified it may be exempted because of some exemption notification or though
eligible for the exemption, but exemption may not be available because of wrong
classification.
(c) Earlier, credit of
service tax paid was available only if both input and output services fell in
the same category of taxable services, therefore, because of wrong
classification, there could be dispute of getting credit.
(d) At present, the rate of
service tax is uniform, therefore, wrong classification will not affect the tax
liability unless it is affected due to aforesaid reasons,
(e) Issues related to exclusion, exemption,
abatement will be applicable on proper classification.
Classification
of Services necessary
Yes. The views have been expressed to the author that since the rate of tax is uniform, therefore, if the assessee is paying service tax on his total receipt then it is immaterial whether service is categorised in appropriate taxable service or not as same will not affect the interest of the revenue. For example, if a practising chartered accountant is rendering the service, which is in the nature of 'management consultant service' if he pays the service tax on the same, then what matters if he pays tax in the category of 'practising chartered accountant' instead of 'management consultant'. The author is of the opinion that service must be categorised in the appropriate taxable service and tax on it must be paid only in that category of taxable service, the argument that when service tax is paid on the total receipt, it is immaterial to categorise the services as service tax rate is uniform and does not affect the interest of the revenue, does not hold good in the eyes of law. Therefore, where the same assessee is providing more than one taxable service, he is eligible to take single registration for all the taxable service, but in such a situation, the Board in its Circular No. ST‑51/13/2002 [F. No. 178/l/2002‑CX.4], dated 7‑1‑2003 (appended as Annexure 1) clarified, "tax liability will have to be discharged for each of the taxable services separately".
The
Government in its para 27 of the Circular/letter F. No. B2/8/2004TRU, dated
10th September, 2004 (appended as Annexure III) regarding clarification for the
services introduced by the Finance (No. 2) Act, 2004 has clarified that
"many of the services covered under fresh levies may include activities
that were taxable earlier under different category of taxable services. While
the classification of a taxable service would be in terms of section 65A of the
Finance Act, 1994, it should be ensured that there is no double taxation and a
service is taxed only once under the appropriate category"
Guiding
principle of Classification described in the Circular
Earlier,
the Central Board of Excise and Customs had also issued Circular No. ST‑51/13/2002
[F. No. 178/1/2002‑CX.4], dated 7‑1‑2003 (appended as
Annexure I). It has suggested that the guiding principle for classification of
services should be that a service should be categorized under that category
which is more specific. It was also clarified that in each case where such
problems arise the proper Central Excise Officer has to decide on merits as to
which is the more specific category and charge tax accordingly. Board in the
aforesaid Circular had stated that pending issues may be disposed of on the
basis of the above guidelines. Past cases need not be re‑opened.
Now, to
set aside all doubt in this regard, the Finance Act, 2003 has introduced a new
section 65A to provide the manner of determination of classification of taxable
services. After the introduction of aforesaid section 65A, the guideline for
the classification of taxable service given in the aforesaid Circular shall not
apply but the manner of classification described in section 65A shall apply.
Principles laid down in Section 65A for
classification of services
Section
65A provides that classification of taxable services shall be determined:
(i) According to the terms
of the sub‑clauses of clause (105) of section 65, under which taxable
service has been defined.
(ii) Where for any reason, a
taxable service is, prima facie, 'classifiable under two or more taxable
services under aforesaid clause (105), then classification shall be made as
follows:
(a) the sub‑clause of
taxable service which provides the most specific description shall be preferred
to the sub‑clause of taxable service which provides a more general
description.
As for
example, a hotel may rent out a conference room for an official conference
where lunch is also served. A dispute could arise in this case as to whether
this particular service would fall under the category of 'mandap keeper' and
exempt from tax vide Notification No. 12/2001‑Service Tax, dated 20‑12‑2001,
or it will fall under the 6tegory of 'convention services' and charged to
service tax. Between the two competing categories, in this case, the more
specific one would be that of a 'convention service' since a 'mandap keeper'
includes official, social as well as business functions whereas a 'convention
service' covers conventions only which is like an official function. Hence in
this case the service would not be exempt from service tax in the category of
'mandap keeper' but taxed as 1convention services';
(b) where composite services
consisting of a combination of different services which cannot be classified in
the manner discussed above at (a), it shall be classified as if they consisted
of a service which gives them their essential character, in so far as this
criterion is applicable;
(c) when a service cannot be
classified according to both the manners discussed above at (a) & (b), then
it shall be classified under the subclauses of taxable service which occurs
first among the sub‑clauses of taxable services under aforesaid clause
(105), which equally merit consideration.
Classification of Internet Telephony Services
The
Government in its Circular No. ST54/3/2003, dated 21 April 2003 (appended as
Annexure II) has clarified the doubts raised regarding the classification of
internet telephony services. In the said Circular it was clarified that
transmission of two‑way voice communication through the medium of
Internet is called Internet Telephony, which is made possible through data
transfer over the Internet. As per provisions of the Service Tax, the term 'on‑line
information and database access or retrieval' means providing data or
information, retrievable or otherwise, to a customer, in electronic form
through a computer network. Accordingly, it is confirmed in the aforesaid
Circular that Internet Telephony Services fall under the category of online
information and database access and/or retrieval services.
Classification of Services
I am
directed to say that doubts have been raised regarding classification of
certain services which appear to fall under two or more categories
simultaneously. Some instances where such problems have arisen relate to
Management Consultants vs. Manpower Recruitment Services, Mandap Keepers vs.
Convention Services, Rent‑A‑Cab Scheme vs. Tour Operators, Cargo
Handling Services vs. Storage And Warehousing Services, Architect vs. Interior
Decorator, Scientific And Technical Consulting Services vs. Consulting
Engineer, Practicing Chartered Accountants v Management Consultants, etc.
2. The matter has been
examined in the Board. It is hereby 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 provided 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 can not 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 need only take
one registration, but it shall be endorsed for all the taxable services and tax
liability will have to be discharged for each of the taxable services
separately.
3. However, in the absence
of any interpretative rules, it may become difficult at times to decide the
classification of a particular service. The guiding principle should be that a
service should be categorised under that category which is more specific. As
for example, a hotel may rent out a conference room for an official conference
where lunch is also served. A dispute could arise in this case as to whether
this particular service would fall under the category of 'mandap keeper' and
exempt from tax vide Notification No. 12/ 2001 ‑Service Tax, dated 20‑12‑2001,
or it will fall under the category of 'convention services' and charged to
service tax. Between the two competing categories, in this case, the more
specific one would be that of a 'convention service' since a 'mandap keeper'
includes official, social as well as business functions whereas a 1convention
service' covers conventions only which is like an official function. Hence in
this case the service would not be exempt from service tax.
4. Similarly, in each case where such problems arise the proper Central Excise Officer has to decide on merits as to which is the more specific category and charge tax accordingly.
5. Pending issues may be
disposed of on the basis of the above guidelines. Past cases need not be re‑opened.
Internet
telephony services ‑ Clarification ‑ Reg.
I am
directed to say that doubt has been raised regarding the classification of the
Internet Telephony Service, as to whether this service is covered under the
category of telephone service or online information and database access and/or
retrieval service and hence liable to pay Service Tax.
2. Transmission of two‑way
voice communication through the medium of Internet is called Internet
Telephony. Even if the licences to Internet Telephony Service Providers are
issued under section 4 of the Indian Telegraph Act, 1885, the two way voice
communication is made possible through data transfer over the Internet. As per
Section 65(19), 1994, the term "on‑line information and database
access and/or retrieval" means providing data or information, retrievable
or, otherwise, to a customer in electronic form through a computer network.
Accordingly, it is to confirm that Internet Telephony Services fall under the
category of online information and database access and/or retrieval services.
Issues pertaining to service tax ‑
Regarding
27. Many of the services
covered under fresh levies may include activities that were taxable earlier
under different category of taxable services. While the classification of a
taxable service would be in terms of section 65A of the Finance Act, 1994, it
should be ensured that there is no double taxation and a service is taxed only
once under the appropriate category.