Meaning of the term "Service" in Service tax as per Finance Act, 1994

Service Tax
Meaning of the term “Service”
Abhinav.Chhabra@rocketmail.com
1

Power to levy Service Tax
Entry no. 97 of the union list or the List-I of the Constitution of India gives
power to the parliament to make an act to levy Service tax in India. The
relevant entry of the constitution is as follows:
“97. Any other matter not enumerated in List II or List III including any tax
not mentioned in either of those Lists.”
In conformity with the powers given by entry no. 97 of the constitution of
India, Chapter V of the Finance Act, 1994 gives the power to central
government to levy Service Tax.
2

Further, Section 66B of the Finance Act, 1994 is the charging section
i.e. the section which is the base to charge Service tax and which gives
the answer to the question “Whether my services are liable to Service
Tax?”. The relevant provision of Section 66B is as follows:
“66B. There shall be levied a tax (hereinafter referred to as the service
tax) at the rate of fourteen per cent on the value of all services, other
than those services specified in the negative list, provided or agreed to
be provided in the taxable territory by one person to another and
collected in such manner as may be prescribed.”
3
Power to levy Service Tax

The term “Service” has been defined in sub-section 44 of section 65B of
the Finance Act, 1994. The relevant provision is as follows:
“(44) "service" means any activity carried out by a person for another for consideration, and.
………includes a declared service, but shall not include—
(a) an activity which constitutes merely,—
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any
other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale
within the meaning of clause (29A) of article 366 of the Constitution; or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to
his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force.
The term “Service”
4

Explanation 1.— For the removal of doubts, it is hereby declared that nothing contained in this
clause shall apply to,—
(A) the functions performed by the Members of Parliament, Members of State Legislative, Members
of Panchayats, Members of Municipalities and Members of other local authorities who receive any
consideration in performing the functions of that office as such member; or
(B) the duties performed by any person who holds any post in pursuance of the provisions of the
Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a Member or a Director in a body
established by the Central Government or State Governments or local authority and who is not
deemed as an employee before the commencement of this section.
5

Explanation 2.— For the purposes of this clause, the expression "transaction in money or actionable
claim" shall not include—
(i) any activity relating to use of money or its 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;
(ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in
money or actionable claim, including the activity carried out—
(a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of
lottery or facilitating in organising lottery of any kind, in any other manner;
(b) by a foreman of chit fund for conducting or organising a chit in any manner.
6

The term “Service” 7
Explanation 3.— For the purposes of this Chapter,—
(a) an unincorporated association or a body of persons, as the case may be, and a member thereof
shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any of his other establishment in a non-
taxable territory shall be treated as establishments of distinct persons.
Explanation 4.— A person carrying on a business through a branch or agency or representational
office in any territory shall be treated as having an establishment in that territory;”

According to the definition of the term “Service” given in section
65B(44), it has four basic elements i.e.
A. Any Activity
B. Carried out by a person for another
C. For consideration
D. Includes a declared service
8

Any Activity
The term “activity” has not been defined in the Finance act, 1994. In
such case we will have to go by the common trace parlance i.e. the term
activity would include any act done but the meaning cannot cross the
constitutional limits.
9

Carried out by a person for another
The phrase is self explanatory that any activity carried out for self will
not be covered under the ambit of service tax i.e. the transaction should
be between two separate persons. For example: In a company, there may
be separate divisions and if one division renders a service to another
then such transaction shall not be covered within the ambit of service
tax as the transaction is between the same entity and would amount to
self service.
10

Carried out by a person for another – Cont.
Further, there are various decisions of high courts which establish that
transaction between two divisions of same entity are not liable to service
tax even when separate registration has been taken by the two different
divisions of the entity, in order to substantiate the same we can refer to
the decision of the Hon’ble Tribunal in the matter of Mahindra Logistics
Ltd. V. CC,CE & ST.
11

Carried out by a person for another – Cont.
The Tribunal in para 6 observed as follows:
“6. Considering the submissions made by the learned Chartered
Accountant we find that Mahindra & Mahindra Limited is a legal entity
which is having two separate divisions. Merely by taking two separate
service tax registrations it cannot be said that both are separate legal
entities. Therefore, demand for the period 15/12/2007 to 10/9/2008 is
not sustainable”.
12

For consideration
The term consideration has not been defined for the purpose of this
section. Therefore, we can refer to Indian Contract Act, 1872, which
will mean anything which the receiver of service or any other person
has done or abstained from doing or promised to do or abstained from
doing. That is any service provided free of cost will not be liable to
service tax as there is no consideration in return.
13

Includes declared service
After introduction of service tax, there have been lot of controversies
and litigation with regard to certain activities that whether they are a
service or not. Therefore, with a view to remove any ambiguity for the
purpose of uniform application of law all over the country, few services
were declared. There services are declared under section 66E and
currently there are 9 services, like renting of immovable property,
development of software, temporary transfer of intellectual property,
etc. [refer section 66E of Finance Act, 1994].
14

Specific exclusions
There are a few specific exclusions to the definition of “Service”. The
exclusions are as follows:
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of
clause (29A) of article 366 of the Constitution; or
(iii) a transaction in money or actionable claim ( Refer explanation 2 to this section given in slide 6).
(iv) a provision of service by an employee to the employer in the course of or in relation to his
employment. i.e. the services given by an employee to his employer in due course of his employment
are not liable to service tax.
15

Specific exclusions – Contd.
(v) fees taken in any Court or tribunal established under any law for the time being in force. A court or
tribunal provides judicial services to the person(appellant) who files appeal and at the time of filing
the appeal a filing fee is charged. Clause (c) specifically excludes fee charged by a court or tribunal
from levy of service tax.
16

Non applicability of this sub-section
Anything contained in this sub-section i.e. the definition of “service”
shall not applicable to a few functions and duties that the mentioned in
explanation 1 to this clause. [refer slide 5]
17

Explanation 3 – Clause (a)
Clause (a) of this explanation brings into the net of service tax any
service provided or to be provided by an unincorporated association or
body of persons to their members. But even after the insertion of this
explanation, Hon’ble Jharkhand High Court decided that services
provided by a club to its members could not be charged to service tax as
club and its members were governed by the principle of mutuality.
[Refer to the decision of Ranchi Club Ltd. V. CCCE & ST]
18

Explanation 3 – Clause (b)
Clause (b) of this explanation brings into the net of service tax any
service transactions between an entity in taxable territory and its another
establishment in non-taxable territory by treating them as different
persons.
19

Explanation 4
This explanation clarifies that branch, agency or representational office
shall be treated as separate establishment. This will not have any effect
if both the head office and branch, agency or representational office are
in the taxable territory but this will bring the transaction into the net of
service tax if either the head office or branch, agency or representational
office are in non taxable territory.
20

Meaning of the term "Service" in Service tax as per Finance Act, 1994

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Meaning of the term "Service" in Service tax as per Finance Act, 1994