A Knowledge Workshop on “New Regime of Service Taxation in India”

1. Corporate Knowledge Foundation
Presents
A Knowledge Workshop
On
“New Regime of Service Taxation in India”
Conducted by
Dr. Sanjiv Agarwal
FCA, FCS
Saturday,
14th July,2012
New Delhi © Dr. Sanjiv Agarwal

2. Corporate Knowledge Foundation
SESSION III
Declared Services
(Including Valuation)
&
Bundled Services

3. As defined in clause 44 of section 65B, ‘service’ includes a declared service.
There are 9 categories of services or activities as declared services
implying that on all such nine declared services, Service Tax shall be payable
Does not include any such transfer, delivery or supply of any goods which is
deemed to be a sale within the meaning of Article 366 (29A) of the Constitution
of India.
What is declared services is defined in section 65B (22) to mean any activity
carried out by a person for another person for a consideration and declared as
such under section 66E of the Act.
They are amply covered by the definition of service but have been declared
with a view to remove any ambiguity for the purpose of uniform application of
law all over the country
3

4. Following constitute Declared Services (Section 66E)
 Renting of immovable property;
 Construction of a complex, building, civil structure or a part thereof,
including a complex or building intended for sale to a buyer, wholly or
partly, except where the entire consideration is received after issuance of
certificate of completion by a competent authority;
 Temporary transfer or permitting the use or enjoyment of any intellectual
property right;
 Development, design, programming, customization, adaptation, up
gradation, enhancement, implementation of information technology
software;
4

5.  Agreeing to the obligation to refrain from an act, or to tolerate an
act or a situation, or to do an act;
 Transfer of goods by way of hiring, leasing, licensing or any
such manner without transfer of right to use such goods;
 Activities in relation to delivery of goods on hire purchase or any
system of payment by installments ;
 Service portion in execution of a works contract;
 Service portion in an activity wherein goods, being food or any
other article of human consumption or any drink (whether or not
intoxicating) is supplied in any manner as part of the activity.
5

6. Renting of Immovable Property
Renting of Immovable Property
Renting (Section 65B (41)) allowing, permitting or granting access, entry,
occupation, usage or any such facility, wholly or partly, in an immovable
property, with or without the transfer of possession or control of the said
immovable property and includes letting, leasing, licensing or other similar
arrangements in respect of immovable property
Renting of certain kinds of immovable properties is specified in the negative list
• Renting of vacant land, with or without a structure incidental to its use,
relating to agriculture.
• Renting of residential dwelling for use as residence
• Renting out of any property by Reserve Bank of India
• Renting out of any property by a Government or a local authority to a
non-business entity
6

7. Renting of Immovable Property
Exemptions to Renting of Immovable property
Threshold level exemption up to Rs. 10 lakh.
Renting of precincts of a religious place meant for general public is
exempt.
Renting of a hotel, inn, guest house, club, campsite or other
commercial places meant for residential or lodging purposes, having
declared tariff of a room below rupees one thousand per day or
equivalent is exempt.
Renting to an exempt educational institution
Municipal taxes (Notification No. 29/2012-ST dated 20.6.2012) 7

8. Renting of Immovable Property
The immovable property could be –

factories

office buildings

warehouses
 theatres
 exhibition halls, and

multiple use buildings.

commercial markets

shops / shopping centre

hotel, guest houses etc

community centre etc
 Allowing or permitting the usage of immovable property
without transferring possession of such property is also
renting of immovable property.
8

9. Renting of Immovable Property
Nature of Activity Taxability
Renting of property to educational body Chargeable to service tax; no exemption
Renting of vacant land for animal husbandry Not chargeable to service tax as it is covered in the
or floriculture negative list entry relating to agriculture
Permitting use of immoveable property for Chargeable to service tax as permitting usage of
placing vending/dispensing machines space is covered in the definition of renting
Allowing erection of communication tower Chargeable to service tax as permitting usage of
on a building for consideration. space is covered in the definition of renting
Renting of land or building for entertainment Chargeable to service tax as there is no specific
or sports exemption.
Renting of theatres by owners to film Chargeable to service tax as the arrangement
distributors amounts to renting of immovable property.
Renting of immovable property outside India not taxable in India even if owners are
in India

10. Construction Activities
Construction Activities [Section 66E (b)]
Construction activities means construction of a complex, building,
civil structure or a part thereof, including a complex or building
intended for sale to a buyer, wholly or partly, except where the entire
consideration is received after issuance of completion certificate by the
competent authority.
It includes construction of -

Complex
 Building

Civil structure or part thereof

Complex or building intended for sale to a buyer except where
entire consideration is received after issuance of completion
certificate by the competent authority.
Actual sale after construction-if consideration received before such
completion will also be taxed.
10

11. Construction Activities
Construction is not defined
Construction Includes
 additions,
 alteration,
 replacement, or
 remodeling
of any existing civil structure
11

12. Construction Activities
Who is Competent Authority to Issue Completion Certificate
Government
Any authority authorized to Issue CC under any law
In absence of any requirement to issue CC,
• architect under Architect Act, 1972
• Chartered Engineer register with 10E
• licensed surveyor (of local body / development or planning
authority)
12

13. Construction Activities
Residential Complex
Complex comprising of one or more buildings having more than one
residential unit
Even two units would be called ‘complex’
Single residential unit – self contained residential unit designed for
use, wholly / principally, for residence of one finely
Original work – new construction and all type of addition / alteration
to abandoned / damaged structures on land as are required to make
them workable / erection , commissioning, installation.
13

14. Intellectual Property Right
Temporary transfer or permitting the use or enjoyment of any
intellectual property right [Section 66 E (c)]
Intellectual property right’ has not been defined but Intellectual Property
Right includes :
• Copyright
Patents
Trademarks
Designs
Any other similar right to an intangible property
14

15. Intellectual Property Right
Examples of IPRs
Patents - New technical concepts,
inventions
Copyright - Text, graphics, software, data
compilations, art, music
Trademarks - Brands (Services/ Products)
image and reputation
Confidential Information - Ideas, information, know-how
etc.
Design Rights - Form and appearance,
decoration
15

16. Intellectual Property Right
What is taxed in IPR
all IPRs (whether recognized in law or not)
excluding copy rights
temporary transfer of IPRs
permitting the use of IPRs
enjoyment of IPRs
16

17. Intellectual Property Right
Copyrights as IPRs are exempted which include :
literary work
dramatic work
musical work
artistic works
cinematograph films
17

18. Information Technology Software
Information Technology software related services [section 66E(d)]
It includes following in relation to Information Technology Software
(ITS) –
 Development

Design

Programming

Customization
 Adaptation
 Upgradation

Enhancement
18


19. Information Technology Software
ITS is defined in Section 65B(28)
ITS is a representation
Representation in ITS should be of any of the following –
• Instruction
• Data
• Sound
• Image
• Source code
• Object code
Such items represented should be recorded in a machine readable
form,
Such items represented and recorded should be capable of being
manipulated.
They should provide interactivity by way of a –
• computer, or
• automatic data processing machine, or 19

20. Information Technology Software
Scope of ITS Service
Design - plan, scheme
Programming - process of writing a computer programme
Customisation - modifying to meet a specific requirement
Adaptation - change to suit, adopt
Upgradation - raising standard, improving quality / version /
features
Enhancement - in value, content, quality
Implementation - execution
20

21. Obligations / Actions
Agreeing to obligation to refrain from on Act / to tolerate Act
or situation / to do an Act [section 66E(e)]
Following activities if carried out by a person for
another for consideration would be treated as
provision of service -
Agreeing to the obligation to refrain from an act.
Agreeing to the obligation to tolerate an act or a situation.
Agreeing to the obligation to do an act.
21

22. Obligations / Actions
Examples of Obligations / Actions
non compete fees for agreeing not to compete
compensation on termination of business agreements
advance forfeited for cancellation of agreement to provide a
service.
forfeiture of security deposit for damages done by service
receiver in course of receiving of services.
cancellation charges being charged by airlines, hotels etc.
consideration for non-appearance in a court of law or
withdrawal of suit.
demurrage charges or detention charges
22

23. Transfer of Goods
Transfer of goods by hiring, leasing, licensing [66E(f)]
There should be transfer of goods involved
Such transfer of goods should be by way of –

hiring
 leasing

licensing, or

any such manner
Such transfer should be without transfer of right to use
such goods.
Excludes intangible goods
Only goods [section 65B(25)] covered
23

24. Transfer of Goods
Transfer of right to use
Taxable only when transfer of right to use goods is there
Constitutional / legal concept
Can be determined when agreement in read in whole, not
just one clause
Transfer of right to use is deemed sale u/a 366(29A) of
Constitution
If owner retains effective control, no transfer of right can
take place
Service excludes deemed sale u/a 366(29A)
24

25. Transfer of Goods
Tests laid down by Supreme Court in BSNL v UOI [(2006)2 STR 161
(SC)]
There must be goods available for delivery ;
There must be consensus ad idem as to the identity of the goods;
The transferee should have legal right to use the goods –
consequently all legal consequences of such use including any
permissions or licenses required therefore should be available to the
transferee;
For the period during which the transferee has such legal right, it has
to be the exclusion to the transferor – this is the necessary
concomitant of the plain language of the statute, viz., a ‘transfer of the
right to use’ and not merely a license to use the goods;
Having transferred, the owner cannot again transfer the same right to
others
25

26. Transfer of Goods
Article 366 (29A) of Constitution of India, as amended by Constitution (46th
Amendment) Act, 1982, w.e.f 2.2.1983
"Tax on the sale or purchase of goods" includes-
a tax on the transfer, otherwise than in pursuance of a contract, of
property in any goods for cash, deferred payment or other valuable
consideration;
a tax on the transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract;
a tax on the delivery of goods on hire-purchase or any system of
payment by installments;
a tax on the transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred payment or
other valuable consideration;
to be contd……
26

27. Transfer of Goods
a tax on the supply of goods by any unincorporated association or
body of persons to a member thereof for cash, deferred payment or
other valuable consideration;
a tax on the 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,
and such transfer, delivery or supply of any goods shall be deemed to
be a sale of those goods by the person making the transfer, delivery or
supply and a purchase of those goods by the person to whom such
transfer, delivery or supply is made. 27

28. Transfer of Goods
Examples of transfer without right to use
Car on hire with driver – right to use not transferred
Conditional supply of equipment – not free to use goods
Bank lockers – possession not transferred to hirer
Hiring of audio visual equipment with attendant – no transfer of
right / possession

29. Includes delivery of goods on -
 hire purchase

any system of payment by installment
Payment in parts / installments
Lease payment is calculated so as to cover full cost of asset together
with interest charges
Transfer of substantially all risks and rewards in relation to goods so
transferred
Not taxable as covered under deemed sale of goods
But services in relation to such sale taxable
29

30. Delivery of goods on hire purchase
Transfer of possession (and not just of custody)
The hirer has the option or obligation to purchase the goods in
accordance with the terms of the agreement.
In hiring, hirer has no such option and risks remain with owner /
not transferred to hirer
In hire purchase, hirer has option / obligation to purchase goods
Operating lease not covered
Involves two transactions – financial transaction and hire
purchase. Financial transaction is chargeable to Service Tax
[Association of Leasing & Financial Services v. Union of India
(2010) 20 STR 417 (SC)].
Service Tax levied only on 10 percent value representing interest
in financial lease and not full value (Notification No. 26/2012-ST)
30

31. Works contract [65B(54)]
 “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 movable or
immovable property or for carrying out any other similar
activity or a part thereof in relation to such property.
31

32. Works contract covers
Construction
Erection
Commissioning
Completion
Fitting out
Repair
Maintenance
Renovation
Alteration, or
Any other similar activity or part there of 32

33. Such activities could be in relation to any –
Movable property (plant, machinery,
equipments etc)
Immovable property (land, building,
structures etc)
This definition is very vast and covers
almost everything
33

34. Some issues in works contracts
Labour contracts Excluded
Repair & Maintenance of motor yes if property in goods
vehicles transferred in execution of WC
Construction of pipeline / conduit
yes, structures on land
Painting/repair/renovation of building yes if involves provision of
material also
Erection/commissioning installation of yes if transfer of property in
plant/ machine etc goods is involved and machinery
etc are embedded / attached to
earth after the job.
34

35. Value of service portion in execution of work contract = gross amount charged for works
contact less value of transfer of property in goods involved in execution of works contract
Gross amount includes Gross amount does not include
Labour charges for execution of Value of transfer of property in goods involved in the
the works execution of the said works contract.
Amount paid to a sub-contractor Note:
for labour and services As per Explanation (c) to sub-rule (i), where value added
Charges for planning, designing tax or sales tax has been paid or payable on the actual
and architect’s fees value of property in goods transferred in the execution of
the works contract, then such value adopted for the
purposes of payment of value added tax or sales tax, shall
be taken as the value of property in goods transferred in
Cost of establishment of the the execution Tax (VAT) or sales tax, as the case may be,
Value Added of the said works contract.
contractor relatable to supply of paid, if any, on transfer of property in goods involved in
labour and services and other the execution of the said works contract
similar expenses relatable to
supply of labour and services
Profit earned by the service
provider relatable to supply of
labour and services 35

36. Alternative valuation model (Rule 2A of Valuation Rules)
Where works contract is for… Value of the service portion shall
be…
(A) execution of original works forty percent of the total amount charged
for the works contract
(B) maintenance or repair or seventy per cent of the total amount
reconditioning or restoration or servicing charged including such gross amount
of any goods
(C) in case of other works contracts, not sixty percent of the total amount charged
included in serial nos. (A) and (B) above, for the works contract
including contracts for maintenance,
repair, completion and finishing services
such as glazing, plastering, floor and wall
tiling, installation of electrical fittings.
36

37. Total Value = Sum total of
+ gross amount charged
+ value of goods and services supplied free of
cost for use in or in relation to execution of WC
Same Contract
Any other Contract
+ value of land charged as part of total
consideration
- amount charged for such goods / services, if
any
- VAT levied, if any
If value of FOC goods / services is not ascertainable, it will be
determined on basis of fair market value having close resemblance
FMV based on generally accepted accounting principles
No Cenvat available on goods / inputs used in works contract 37

38. Supply of foods and drinks is deemed sale and hence not taxable
However, only service portion in deemed sale is sought to be taxed
Service portion in activity wherein goods, being food or any other article
of human consumption or any drink (whether or not intoxicating) is
supplied in any manner as a part of the activity is a declared service.
Levy of Service Tax on services provided by only such restaurants where
service portion in total supply is substantial and discernible
38

39. Restaurants provided conditional exemption

Services provided in relation to serving of food or beverages by
a restaurant, eating joint or a mess, other then those having the
facility of air-conditioning or central air-heating in any part of the
establishment, at any time during the year, and which has a
license to serve alcoholic beverage.

Threshold exemption
What activities are covered –
• Supply of food or drinks in a restaurant;
• Supply of food and drinks by an outdoor caterer.

40. in a restaurant -40% of total value charged
by outdoor catering - 60% of total value charged
Exemption under Notification No. 25/2012-ST to mid day meal scheme
and restaurants without bar license / air conditioning / central heating
facility
Abatement @ 30% Notification No. 26/2012-ST provided Cenvat credit is
not taken on goods
40

41. Total Value = Sum total of
+ gross amount charged
+ Value of goods and services supplied free of cost for use
in or in relation to supply of food under
Same contact
Any other contract
+ value of land charged as part of total consideration
- amount charged for such goods / services, if any
- VAT levied, if any
If value of FOC goods / services is not ascertainable, it will be determined on basis of
fair market value of having close resemblance
FMV based on generally accepted accounting principles
No Cenvat available on goods used in supply of food

42. Amendment in Rule 6
Inclusion -
a) Any amount realized as demurrage, or by any other name, for the
provision of a service beyond the period originally contracted or in any
other manner relatable to the provision of service will be included in
taxable value
Exclusions -
a) Accidental damages due to unforeseen actions not relatable to the
provision of service will be excluded from the value of service
b) Interest on loan has been substituted with
I. Interest on Deposits and
II. Interest on delayed payments. (Interest on loans will now be exempt)
c) subsidies and grants disbursed by the Government, not directly affecting
the value of service.
42

43. Principles of Interpretation of specific description of services [section 66F]
Section 65A dealing with classification of taxable services omitted w.e.f.
1.7.2012
useful in deciding whether a service falls in negative list / exemptions /
declared services
composite v. bundled service
bundled service –
 collection of services / tied up services
 more than one service
 element of one service combined with element of provision of other
service (s).
Examples - Mailing done by RTI, Air traveling and catering therein
Earlier issue – which taxable service
Now – whether any activity is a ‘service’ or not a ‘service’.
43

44. Rule 1
Reference to main service can not be used for services used for providing
the main service
If some service is provided with reference to provision of main service,
it does not be come main service,
Related services do not take the colour of main service.
Examples
• Provision of access to any road or bridge on payment of toll
 Security services
 IT related same
 Contract commission
Transportation of passengers by rail
Air travel agency
Tour operators
44

45. Rule 2
Most specific description to be preferred over more general
description for services capable of differential treatment for
any purpose based on its description
Examples
 Real estate agent for immovable property
• If taxed as intermediary, his location is important
• If taxed as immovable property, location of property is
important
Outdoor catering by pandal & shamiana / convention to
be taxed as specific combined entry exist for abatement
and not as individual services
45

46. Taxability of naturally bundled services in ordinary course
of business (Rule 3)
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
Perception of service provider / service receiver
Trade practice
Example
• Packaged hotel accommodation for convention
delegates may include
Hotel room accommodation
Breakfast
Tea / coffee during conference
46

47.  Access to gym / health club / pool
 Internet
 Business centre
 Sight seeing
Could be considered as naturally bundled convention services as each
activity is taxable but does not provide essential character and taxed
accordingly
Indicators of naturally bundled services
 There is a single price or the customer pays the same amount, no matter
how much of the package they actually receive or use
 The elements are normally advertised as a package.
 The different elements are not available separately.
 The different elements are integral to one overall supply – if one or more is
removed, the nature of the supply would be affected.
Each case to be individually examined

48. Bundled Services
Rule 4 Taxability of services not naturally bundled ink ordinary course of
business
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.
Examples

Renting of two floors or two portions of building by a common
agreement (treated as commercial use)

Management of event covering advertisement, promotion, space
booking, photography, videography, public relation etc.