Valuation of Service for Service Tax

The article highlights the issue on whether body corporate rendering banking and other financial service is liable to pay service tax. The article also provides insight on some of the latest case laws in service tax.

1. Are all body corporate rendering banking and other financial services not required to pay service tax? Further, is Post Office a bank?

The issue before Board was whether services such as money orders, operation of bank accounts, and issue of postal orders provided by Department of Posts are liable to service tax under “Banking and Other Financial Services”

The Board clarified vide Circular No. 83/1/2006 dated 4-7-2006 as under:—

1. Banking and other financial services are defined under section 65(12). Such services provided to a customer by a banking company or a financial institution including a non-banking financial company or any other body corporate or any other person to a customer are liable to service tax under section 65(105)(zm). The expression ‘any other person’ appearing in section 65(105)(zm) is to be read ejusdem generis with the preceding words. The expression ‘other financial services’ appearing under section 65(12)(a)(ix) is a residuary entry and includes those services which are normally rendered by banks or financial institutions.
    

2. Hence, banking and other financial services provided by a banking company or a financial institution or a non-banking financial company or any other service provider similar to a bank or a financial institution are liable to service tax under section 65(105)(zm) of the Finance Act, 1994. Department of Posts is not similar to a bank or a financial institution and hence does not fall within the category of any other similar service provider.
    

3. In view of the foregoing, it is clarified that services such as transfer of money through money orders, operation of savings accounts, issue of postal orders provided by the Department of Posts are not liable to service tax under section 65(105)(zm) read with section 65(12) of the Finance Act, 1994.

As per section 105(zm), taxable service in relation to banking and other financial services means: “any service provided to a customer, by a banking company or financial institution including a non-banking financial company or any other body corporate or any other person, in relation to banking and other financial services”

The question that arises is whether the interpretation of reading ejusdem generis with the preceding words should also apply for the words “any body corporate”, one of the constituents of the above definition? If yes, then all body corporate paying taxes on banking and financial services like leasing services, hire purchase services, asset management services, etc will not fall within the ambit of the definition mentioned above.

It is worthwhile to note that as a result of clarification given by CBEC vide instructions F.No. B11/1/2002-TRU dated 1-8-2002, all body corporate providing the specified “banking and other financial services” have come under the service tax net w.e.f 16-8-2002. Earlier, it was clarified vide Ministry’s instructions  F.No. B-11/1/2001 dated 9-7-2001 that asset management companies are not NBFC. Hence, they would not come under the purview of services tax. This instruction stands amended now as Asset management Companies being “body corporate” will henceforth be liable to pay service tax. Similarly, all merchant bankers, portfolio managers, foreign exchange brokers etc., who are “body corporate” have been liable to pay service tax w.e.f 1-8-2002.

To conclude, clarification issued that post office is not similar to a bank or financial institution and so is not liable to tax may have a far-reaching impact of providing exemption to all body corporate, which are not similar to a bank or financial institution. Now let us examine the issue of whether post office is similar to a bank?

• The Banker’s Books Evidence Act defines “bank” as

1. any company or corporation carrying on the business of banking.

2. any partnership of individual to whose books the provisions of this Act shall have been extended as hereinafter provided,

3. any post office savings bank or money order office;

• Explanation to Rule 67 of the Income Tax Rules, 1962 states as under:—

For the purposes of this rule and rules 85 and 101, (i) moneys received after the 31st day of October, 1974, on transfer, maturity or realisation of any security or deposit forming part of a fund or by withdrawal from any account in a bank (including a Post Office Savings Bank Account) shall be deemed to be moneys accruing to the fund after that date;

• The Post Office Savings Bank is the largest retail bank in the country, operating from over 1,50,000 branches. In the last financial year alone, the POSB collections stood at Rs 200,000 crores. The web site www.indiapost.gov.in. also mentions banking as one of the financial services offered by the Indian Posts.

It is clear from the above that Department of post is not only similar to bank but is actually a bank.

However, the Board says that Department of Posts is not similar to a bank or a financial institution. The intention of government to exempt the postal department from Service Tax could be achieved by issuing an exemption notification as they have done in the case of RBI. Clarification of such nature is harmful and will lead to unnecessary litigation.

2. Some important CESTAT cases:—

• LARSEN & TOUBRO LTD vs. CCE, CHENNAI dated 22-6-2006 (FINAL ORDER NO. 1-9/06-Larger Bench)

It was held that mere procuring/booking orders for the principal by an agent on payment of commission basis would not amount to providing services as ‘clearing and forwarding agent’ within the meaning of the definition of the expression ‘clearing and forwarding agent’ under section 65(25) of the Finance Act, 1994. The Tribunal decision in the case of Prabhat Zarda is overruled by Larger Bench.

Services of commission agent are included in the definition of “business auxiliary service” under sub-section (19) of section 65 w.e.f. 1-7-2003, which includes service of a commission agent.

Definition of commission agent in Explanation (a) to sub-section (19) of section 65 clearly shows that the activity of mere procurement of purchase orders for the principal on commission basis of a commission agent is treated separately by the Parliament from the activities of a clearing and forwarding agent. The expressions “directly or indirectly” and “in any manner” occurring in the definition of “clearing and forwarding agent” cannot be isolated from the activity of clearing and forwarding operations.

• PRECOT MILLS LTD vs. COMMISSIONER OF CENTRAL EXCISE, TIRUPATI dated 27-2-2006 (FINAL ORDER Nos. 460-461/2006)

Assessee owns various units functioning as separate profit outfits. One unit of the assessee provides service to another unit. It was held that since all units are a part of the same corporate legal entity, no client-principal relationship exists. Thus, no service tax is leviable.

• M/s IDEA MOBILE COMMUNICATIONS LTD vs. COMMISSIONER OF CENTRAL EXCISE, Thiruvananthapuram dated 25-5-2006

This appeal arises from OIA No. 23/03 dated 31-3-2003 by which service tax has been levied on the ground that assessee is rendering services on cellular phones. The assessee did not reveal that they had not incorporated the activation charges in the form of price of SIM card which they are collecting from their subscribers while computing the value of taxable services. The matter was adjudicated by the Kerala High Court confirming payment of service tax, penalty and interest. However this issue was taken up before the Apex Court in the case of Bharat Sanchar Nigam Ltd., and Another vs. UOI in Writ Petition (Civil) No. 183 of 2003 wherein the Apex Court has remanded the matter to determine as to whether the sales tax has been levied or not.

The assessee submitted that they are not challenging the levy of sales tax and conceded that the item sold by them are goods and once sales tax have been levied, there cannot be levy of service tax as there is mutual exclusivity in terms of Apex Court in the case of Gujarat Ambuja Cements Ltd. vs. UOI (2005 (4) SSC (214, 228) which has been quoted in the case of BSNL vs. UOI. The quoted para is as follows: “This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries. This would not bring within its purview a tax on subject-matter which a fair reading of the entry does not cover. If in substance the statute is not referable to a field given to the State, by any principle of interpretation allow a statute not covered by it to intrude upon this field.”

The assessee argued that sales tax being State subject; therefore, the Centre cannot claim Service Tax on that item. The Tribunal held that in terms of the Apex Court judgment and the paragraph quoted (supra) the appellants contention is required to be accepted. In terms of the Apex Court judgment, the levy of service tax is not sustainable.

3. Notification No. 25/2006-St, Dated 13-7-2006: Exemption to practising Chartered Accountant, practising Cost Accountant and practising Company Secretary

Services rendered by practicing CA, CS and Cost Accountant in relation to representing the client before any statutory authority in the course of proceedings initiated under any law for the time being in force, by way of issue of notice are exempted from the whole of service tax vide Notification No. 25/2006, dated 13-7-2006.