| Circular
No. 59/8/2003
20th June, 2003
F. No. B3/7/2003-TRU
Government of
India
Ministry of Finance
Department of
Revenue
Tax Research
Unit
Subject:
Imposition of Service Tax on new services consequent to
enactment of Finance Bill, 2003-reg.
1. APPOINTMENT
OF EFFECTIVE DATE FOR THE NEW SERVICES
It may be recalled
that the Finance Act, 2003 has made provisions to levy service
tax, from a date to be notified later on, on the following
new services,-
- Commercial training &
coaching center
- Technical testing &
analysis; technical inspection and certification
- Maintenance and repair
service
- Commissioning and installation
- Business auxiliary services
- Internet café
- Franchise service
Further,
it was also provided in the Finance Act to extend the
scope of services already covered under the tax net in
case of,-
- port services (which
were earlier limited to major ports) to cover all ports
under the service tax net;
- authorised automobile
service was brought under the tax net with effect from
16.7.2001. However, it was restricted only to motorcars
and two wheeled motor vehicles. Buses, trucks, maxi cabs
etc were not covered. Provision have been made to widen
the scope of authorized automobile service to cover all
such vehicles;
- foreign exchange broking
service provided by any body corporate or non-banking
financial company was covered under the tax net in the category
of banking and other financial service with effect from
16.7.2001. Provisions have been made to extend the scope
of the tax to include the service provided by all foreign
exchange brokers (including moneychangers and forex dealers).
As per
the provisions of the Finance Act, the above levies or
extensions of levies are to come into effect from a date
to be appointed by the Central government. In this
regard, vide notification No.7/2003-Service Tax, date
20th June 2003, the government has appointed 1st
July, 2003, as the date from which the levy of Service
tax on the above services would come into effect.
2.
EXEMPTIONS AND CLARIFICATIONS
2.1 BUSINESS
AUXILIARY SERVICE:
2.1.1 Call
centers and medical transcription centers:
Business
auxiliary services provided by call centers (i.e. commercial
concern which provides assistance, help or information,
through telephone, on behalf of another person) and medical
transcription centers (i.e. commercial concern which transcribes
medical history, treatment, medical observations and the
like) have been fully exempted from levy of service tax
w.e.f. 1st July, 2003, vide notification No.
8/2003-Service Tax, dated 20th June, 2003.
2.1.2 Commission
agent:
As per
the definition of business auxiliary services, services
as commission agent are considered business auxiliary
services. However services of commission agents
have been exempted from service tax w.e.f. 1st
July, 2003 vide notification No.13/2003-Service Tax dated
20th June 2003. Commission agent has been defined
in the notification, as a person who causes sale or purchase
of goods, on behalf of another person for a consideration,
which is based on the quantum of such sale or purchase.
It may be noticed that the exemption under this notification
is for a commission agent while the services of a consignment
agent remain taxable under the category of Clearing and
Forwarding services. It may be appreciated that the nature
of service provided by a Consignment agent is different
than that provided by a commission agent. A consignment
agent’s job is to receive the goods from the principal
and dispatch them on the directions of the principal,
whereas a commission agent’s job is to cause sale/purchase
on behalf of another person. Thus, the essential difference
is that a commission agent sells or purchases on behalf
of the principal while consignment agent receives and
dispatches the goods on behalf of a principal. It is possible
that a person may be a consignment agent as well as a
commission agent. Such a person would already be covered
in the category of Clearing and Forwarding agent and would
be liable to pay service tax in that category. In other
words, the present exemption is available only to such
commission agent who is not a consignment agent.
2.1.3 Certain
doubts have been raised in case of business auxiliary
services. In this regard the following is clarified,-
- While it is not possible
to give an exhaustive list of business auxiliary services,
the following are illustrations of services that are covered
under this category viz. evaluation of prospective customers,
processing of purchase orders, customer management, information
and tracking of delivery schedules, accounting and processing
of transactions, operational assistance for marketing, formulation
of customer service and pricing policies, managing distribution
& logistics. The services provided in relation to getting
a customer, verification of prospective customer, processing
of purchase order etc would also be covered under service
tax, as the law specifically provides for inclusion of such
services as business auxiliary support services.
- As regards the question
whether insurance agents, C&F agents working on commission
basis fall under the definition of business auxiliary service,
it is clarified that they do not, as they are specifically
covered within the definition of other specified taxable
services, namely the Insurance service and C&F Service
respectively. Under Section 65A of Finance Act 1994, it
has also been provided that in case of overlap, a service
would be classified under the head, (a) which provides most
specific description, (b) in case of a composite service
having combination of different taxable services, the service
which give them their essential character and (c) in case
the test of (a) and (b) does not resolve, the service which
comes earlier in the clauses of Section 65, i.e. the service
that was subjected to service tax earlier. Since Insurance
services and C&F Services are more specific description
and were also subjected to service tax prior to imposition
of tax on business auxiliary service, the insurance agents,
C&F agents working on commission basis would fall under
those respective categories. From this, it follows that
a particular service can be taxed only under one head of
service.
- As per the definition of
business auxiliary services, information technology service
is outside the purview of business auxiliary service. In
the explanation appended to the definition in the Act itself,
it has been clarified that information technology service
means any service in relation to designing, developing or
maintaining of computer software or computerized data processing
or system networking or any other service primarily in relation
to operation of computer systems. In this regard, it is
clarified that only if the output service provided by a
service provider is in the nature of the above operations,
such exclusion would operate. The mere fact that a personal
computer or a laptop has been used for providing the service
does not, ipso facto, make the service an information
technology service. Similarly, the fact that any of the
IT services mentioned in the explanation has been used by
the service provider as an input service does not automatically
make the output service an IT service. Therefore, in such
cases, individual service has to be examined with reference
to the explanation provided to the definition of business
auxiliary service and only such output services which qualify
to be IT services in terms of the said explanation shall
remain excluded from taxable service under the heading business
auxiliary service.
2.2 VOCATIONAL
TRAINING AND COACHING CENTERS:
2.2.1 Commercial
coaching and training services provided by institutes
that prepare applicants for Board examinations and competitive
exams like entrance examinations for Indian Institute
of Technology-Joint Entrance Examinations/Pre Medical
Tests, Civil Services exams etc. are chargeable to service
tax. However, services in relation to commercial coaching
and training, provided by, -
a.
vocational training institute;
b.
computer training institute; and
c.
recreational training institute;
have been
exempted from service tax w.e.f. 1st July,
2003 vide Notification No.9/2003-Servtice Tax dated
20th June 2003. Therefore, vocational coaching
and training services provided by typing and shorthand
institutes, TV/ vehicle repair training institutes, tailoring
institutes, industrial training institutes, foreign language
institutes, computer-training centers, hobby classes,
institutes teaching martial arts, painting, dancing etc
would not be chargeable to service tax. This exemption
would remain in force upto 29th February 2004.
2.2.2 Institutes
like the Institute of Chartered Accountants of India some
time hire the services of other institutes to impart some
part of training (like language or computer training)
to the students undertaking courses for obtaining recognized
degrees/diplomas (like Chartered Accountancy) from their
institute. Whereas institutes the Institute of Chartered
Accountants of India will not be chargeable to service
tax because they confer qualifications recognized by law,
the institutes or centers providing such part of training
may be otherwise under service tax net. Vide notification
No. 10/2003-Service Tax dated 20th June, 2003,
exemption has been provided w.e.f. 1st
July, 2003 to such services rendered by commercial
training or coaching centers from service tax which form
an essential part of the course or curriculum leading
to issuance of recognized certificate, diploma, degree
or any other educational qualification. The exemption
is subject to the condition that the receiver of such
service (for example, student) makes payment for the entire
course or curriculum to the institute or establishment
issuing such certificate, diploma etc. and not to the
commercial coaching or training center.
2.2.3 Certain
doubts have been raised in case of commercial coaching
and training. In this regard, the following is clarified,-
- Whether service tax
is leviable on postal coaching: It is clarified that
service tax is leviable on any coaching or training provided
by an institution on commercial basis. Therefore, the coaching
provided by postal means would also be covered under the
service tax and the charges, including the postal charges
collected for rendering this service would be subjected
to service tax.
- Whether service tax
is leviable on institutes providing commercial coaching
in addition to recognized degree courses: Some institutes
like colleges, apart from imparting education for obtaining
recognized degrees/diploma/certificates, also impart training
for competitive examinations, various entrance tests etc.
It is clarified that by definition, such institutes or establishments,
which issue a certificate, diploma or degree recognized
by law, are outside the purview of "commercial training
or coaching institute". Thus, even if such institutes
or establishments provide training for competitive examinations
etc., such services rendered would be outside the scope
of service tax.
- Whether individuals
going to houses to impart tuition/coaching would be chargeable
to service tax: It is clarified that service tax is
on institutions/establishments. Therefore, only those service
providers are covered under the service tax who have some
establishment for providing commercial coaching or training
i.e. institutional coaching or training. Thus, individuals
providing services at the premises of a service receiver
would not be covered under service tax. However, if coaching
or training center provides commercial coaching by sending
individuals to the premises of service receivers, such services
would be chargeable to tax, as in this case, the individuals
are rendering services on behalf of an institution.
- Whether free summer
training/ in house training provided by employers to their
employees are covered under service tax net: It is clarified
that in case employers provide any free training themselves,
no service tax is chargeable. However if an employer hires
an outside commercial coaching or training center for imparting
some training to its employees, then the payment made by
the said employer to such coaching center will be chargeable
to service tax.
2.3 MAINTENANCE
AND REPAIR SERVICES:
2.3.1 Maintenance
contracts entered into before 1st July 2003:
There are
cases where maintenance contracts are entered into for
a period of more than one year. Vide notification No.11/2003-
Service Tax, dated 20th June 2003 for maintenance
contracts entered into prior to 1st July, 2003,
exemption has been provided to that part of the value
of the service for which bill/invoices have been raised
and the amount has actually been received prior to the
1st July, 2003. For such contracts, all subsequent
payments or payments made against invoice issued subsequent
to the 1st July 2003 will be chargeable to
service tax. Similar will be situation for payments made
for continuing services.
2.3.2 Certain
doubts have been raised in case of maintenance and repair
services as to whether service tax on maintenance and
repair would be charged in cases where during the guarantee
period, the services are provided to the buyer of the
goods while the payments for the same are received from
the supplier of the goods. In this regard it is clarified
that irrespective of the fact that the receiver of the
service is different from the person making payments for
such services, the service tax is leviable on the services
provided towards maintenance and repair. Therefore, for
the services provided during the warranty period by the
dealer or any other authorized person, service tax would
also be leviable on any amount received by such dealer
or such other authorized person from manufacturer of such
goods.
2.4 FRANCHISE
SERVICE:
Franchise
service is a service provided by franchisor to a franchisee.
Section 65 of the Finance Act 1994, (sub section 47) defines
franchise as a specific type of agreement. This agreement
has various ingredients, which have been specified in
the said definition. For removal of doubt it is clarified
that unless all the ingredients mentioned at (i) to (iv)
of the said sub section are satisfied, the agreement can
not be called as franchise agreement. These ingredients
are,-
(i) the
franchisee is granted representational right to sell or
manufacture goods or to provide service or undertake any
process identified with franchisor, whether or not a trade
mark, service mark, trade name or logo or any such symbol,
as the case may be, is involved;
(ii) the
franchisor provides concepts of business operation to
franchisee, including know how, method of operation, managerial
expertise, marketing techniques or training and standards
of quality control except passing on the ownership of
all know how to franchisee;
(iii) the
franchisee is required to pay to the franchisor, directly
or indirectly, a fee; and
(iv) the
franchisee is under an obligation not to engage in selling
or providing similar goods or services or process, identified
with any other person.
For example,
the mere fact that a principal manufacturer has allowed
production of goods bearing his brand name by another
person under ‘License Production Agreement`, does not
make the agreement a Franchise Agreement. A franchise
agreement also includes the franchisee being obliged to
follow the concept of business operation, managerial expertise,
market techniques etc. of the franchisor and is under
an obligation not to engage in selling, producing or providing
similar goods or services, identified with any other person.
Therefore, in the absence of such ingredients, a mere
licensed production cannot be called as a franchise agreement
and accordingly the license fees paid for such license
production cannot be charged to service tax.
2.5 TECHNICAL
INSPECTION AND CERTIFICATION SERVICES:
A doubt
has been raised whether certification given in respect
of immovable property should fall under the purview of
‘technical inspection and certification services`. In
this regard it may be recalled that earlier, CBEC vide
its order No. 1/1/2002, dated 26.02.2003, issued under
Section 37B (of the Central excise Act as made applicable
to service tax) had clarified that certification given
under authority of any code or statute can not be considered
as a consulting engineer service. However, the new service
included in 2003 budget, namely ‘technical inspection
and certification services` would cover certification
of all types including that of immovable property. Therefore,
it is clarified that such services become taxable from
the notified date.
2.6 COMMISSIONING
AND INSTALLATION SERVICES:
Certain
doubts have been raised in case of commercial coaching
and training . In this regard, the following is clarified,-
- In case of commissioning
and installation it has been pointed out that in case of
turnkey project, the contract may be indivisible and no
separate value could be assigned to commissioning or installation
of goods. Doubts have also been raised as to what would
be the value of taxable service. It is submitted that it
has been provided in law that service tax is leviable on
erection and commissioning charges only and not on the material
and goods supplied. However, it is upto the service provider
to show the break-up of commissioning or installation charges.
In case service provider shows consolidated charges, service
tax would be leviable on such consolidated amount.
- A doubt has been raised
as to whether charges for erection of plant are covered
under the service tax or only commissioning and installation
charges. It is clarified that the law specifically provides
for taxation of commissioning and installation of plant,
machinery or equipment. Thus all activities other than the
commissioning and installation of the plant/machinery/equipment
per se, will not be chargeable to service tax.
2.7 MANDAP
KEEPER SERVICE:
Religious
places like parish hall, temples etc provide services
as mandap keeper for hosting of social and religious functions.
Though such services are liable to service tax under the
mandap keeper services, vide notification No.14/2003-Service
Tax, 20th June, 2003 services provided
by the religious centers as mandap keeper in their precincts
have been exempted from service tax.
2.8 CREDIT
OF SERVICE TAX PAID ON TELEPHONES:
In regard
to credit of service tax on telephone connection, queries
have been raised as to whether service tax credit would
be admissible on telephone sets installed only in the
business premises. The answer is in the affirmative, and
credit will be allowed only on telephone sets installed
in the business premises. Mobile phones are not covered.
2.9 MISCELLANEOUS
ISSUES:
2.9.1 In
case of authorized service stations, maintenance or repair
services, commissioning and installation services and
photography services it has been provided in the law that
the cost of goods and material shall not form part of
the value to be subjected to service tax, if evidence
(like sale invoice/bill) shows that these goods were sold.
Such dispensation has, however, not been provided for
other services like commercial coaching and training centers,
telecom services. In this regard, a general exemption
under Notification No. 12/2003-service Tax, dated 20th
June, 2003 has been issued exempting that part of the
value of all taxable services from service tax, which
represents the cost of goods or material sold by the service
provider to the receiver of such services during the course
of provision of the taxable services. This exemption would
be available only in cases where the sale of such goods
is evidenced and the sale value is quantified and shown
separately in the invoice. It is also clarified that in
case of commercial training and coaching institutes, the
exclusion shall apply only to the sale value of standard
textbooks, which are priced. Any study material or written
text provided by such institute as a part of service which
does not satisfy the above criteria will be subjected
to service tax.
2.9.2 In
case of a non-resident service provider who does not have
any office in India, the service receiver in India is
liable to pay service tax. A doubt has been raised as
to how such receiver would avail the service tax credit.
As per the existing law, in such cases service receiver
is required to take registration, to pay service tax and
to comply with other procedural formalities. As there
is no bar under service tax law on the service tax payer
to take the same amount back as credit, the service receiver
after having paid the service tax on behalf of the non-resident
service provider, can take credit of the same on the basis
of document/ bill/invoice under which he paid the service
tax.
2.9.3 Though
the new rate of service tax of 8% came into force from
14th May, 2003 on existing 51 services, and
would come into effect from 1st July, 2003
in case of new services and extensions of services, in
certain cases service providers have reportedly collected
service tax @ 8% on such services, even prior to these
specified dates. In such cases, unless the amount is refunded
back to service receiver, the service provider is required
to deposit amount equal to such duty collected in excess
of that is leviable, as per the provisions of the service
tax law.
3. The
contents of this circular may be given wide publicity
so that no difficulty is faced by the trade as well as
the departmental officers in their observance and implementation.
Apart from issuance of trade notice, wide publicity in
the form of press releases and advertisement may also
be given. Meetings/Seminars/ Consultations with the trade
may be conducted to clarify the new provisions and clarifications
relating thereto. Any difficulty faced by the trade in
observance, by the officers in implementation or other
issues pertaining to the new levies may be brought to
the notice of the undersigned. However, references for
clarifications pertaining to existing services may be
made to Member (Service Tax) or to CX-4 Section.
http://www.servicetax.gov.in/servicetax/notifications/notfns-2k3/st_notfns_idx2k3.htm
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