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Landmark Service Tax Judgments: Service Tax Classification

The concept of Classification of Services is fundamentally adopted from its Sister law, viz. Central Excise Act 1944 read with Central Excise Rules, wherein the erstwhile provisions of rule 173 B governed the Classification Principles. Similarly  Section 65A of the Finance Act 1994, specifies norms for classification of services which are taxable u/s 65 of the Act.

Why Classification is necessary ?
The effective rate of the Service Tax varies from one taxable Service to another. Thus to determine the correct effective rate of Service Tax, it is essential that the Service is properly classified.


Incorrect classification of service may result into non availability of certain exemptions or abatements. Thus the assessee pays tax more than what is required by the law, or vice-a-versa. Further,  it is also possible that certain exemption or abatement is not available to the service provider  however, due to mis-classification  the assessee may  wrongly avail such benefit and as a consequence, the department can initiate Recovery proceedings along with  interest and penalty.

Any Service 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.  Service tax cannot be charged twice on the same service

If a service is classified under one category, the tax liability may start from earlier period then other category. For example Service Tax on Mandap Keeper Service was levied from 01-07-1997,replica watches whereas service tax on Convention Service was levied from 16-07-2001. Therefore proper classification becomes necessary to determine the date from which Service Tax was to be levied on the service provided.

Provisions of “Import of Services” and “Export of Services” are different for different service. Some services are categorised on the basis of property situated outside India whereas others  even if partly performed in / outside India they are considered fully performed in / outside India  whereas some Services are to be completely performed in / outside India to be considered as Import or Export respectively.

How to Classify the Services

Section 65A (Please Click To View Amended Section 65 and History of Act)

Classification of taxable services shall be determined according to the terms of the sub-clauses of clause (105) of Section 65,rolex replica watches if service provided belongs to any specific sub-clause then it should be classified as per that sub-clause.[ Please Refer : Section 65A(1), Finance Act, 1994. ]

When taxable service is, prima facie, classifiable under two or more sub-clauses of clause (105) of Section 65, classification shall be effected as follows :-  

(1)  Most Specific Description : The sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description. [ Please Refer : Section 65A(2)(a), Finance Act, 1994. ] 

Illustration : 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 Service Tax vide Service Tax Notification No.12/2001-ST 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 'convention service' covers conventions only which is like an official function.  Hence in this case the service would not be exempt from Service Tax. [ Please Refer : Service Tax Circular No. 51/13/2002, Dated, 07-01-2003. ] 


(2)  Composite Services : Composite services are services consisting of a combination of different services which cannot be classified by their specific description. Such services are to be classified on the basis of the service which gives them their essential character. [ Please Refer : Section 65A(2)(b), Finance Act, 1994. ]

Often services provided consist of more than one service. In such cases, it is important to decide, whether each element of the transaction should be treated separately or as a single composite transaction, although, made up of two or more separate services. A composite service, even if it consists of more than one service, should be treated as a single service based on the main or principal service and accordingly classified.

The decision is to be made on question of facts and law. It will not make a difference if the tax rates of the components are the same as that of the principal service. The problem may arise when some elements are taxable and others are exempt. The guiding principle is to identify the essential features of the transaction. The method of charging does not in itself determine whether the service provided is a single service or multiple services. 

Illustration : Goods Transport Agency provides service to a person in relation to transportation of goods by road in a goods carriage.  The service provided is a single composite service which may include various intermediary and ancillary services such as loading/unloading, packing/unpacking, transshipment, temporary warehousing.  Consignment note and the invoice issued by the Goods Transport Agency for providing the said service include the value of intermediary baby care tips and ancillary services. In such a case, whether the intermediary or ancillary activities are to be treated as part of Goods Transport Agency service and the abatement should be extended to the charges for such intermediary or ancillary service?  


Clarification : Goods Transport Agency provides a service in relation to transportation of goods by road which is a single composite service.  Goods Transport Agency also issues consignment note.  The composite service may include various intermediate and ancillary services provided in relation to the principal service of the road transport of goods.  Such intermediate and ancillary services may include services like loading/unloading, packing/unpacking, transshipment, temporary warehousing etc., which are provided in the course of transportation by road.  These services are not provided as independent activities but they are means for successful provision of the principal service, namely, the transportation of goods by road. The contention that a single composite service should not be broken into its components and classified as separate services is a well-accepted principle of classification. 


[ Please Refer : Service Tax Circular No. 104/07/2008-ST,  Dated 06-08-2008. ]
(3)   When a service cannot be classified in the manner specified in clause (a) or (b) of Section 65A i.e. there is issue regarding classification which can not be solved by following guidelines like Specific Description or Essential Character’, it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration. Services are arranged chronologically u/s 65(105) of the Finance Act, 1994. Therefore if there are two services then the service on which Service Tax is levied earlier will come before the other service u/s 65(105). [ Please Refer : Section 65A(2)(c), Finance Act, 1994. ]
Illustration:  It may happen that a particular service can be classified as Custom House Agent’s Service (Taxable with effect from 15-06-1997) or Port Services (Taxable with effect from 16-07-2001). If the service provided can not specifically be classified with the help of above mentioned guidelines as any one of them  then, it should be classified as Custom House Agent’s Service as it came earlier under the Service Tax levy.


Finance Act 2010 (Budget 2010-11)

D.O.F.No.334/03/2010-TRU Dated : 01/07/2010

Since the inception, the port service has faced major problems with respect to Service Tax. The activities carried out in and around ports are of various natures. Cargo handling, stevedoring, loading, unloading, tug hire, and labour arrangement, custom house agent services, shipping services, transportation, crane services and so on. The Finance Act, 2010 has provided for exception from the general rules of Classification as prescribed under Section 65A of the Act.

It is provided that the provisions of Section 65A will not apply, in cases where services which can be classified under (i) port services, (ii) airport services or (iii) other port services and also under some other category of taxable services

  • The following measures have been taken with intent to ease the classification disputes,-

(i) Certain basic activities undertaken within airports and ports have been kept out of the tax by exempting them. (Refer Notification No.31/2010 - Service Tax dated the 22nd June 2010);

(ii) Service tax paid on certain taxable services that are used in relation to or for export of goods are eligible for refund under Notification No. 17/09-ST. Presently, the list of eligible services under the said notification includes port service but does not include ‘airport service’. In order to correct the anomaly, the said notification has been amended to include ‘airport service’ in the list of eligible services under the said refund scheme (Refer Notification No. 37/2010-Service Tax, dated the 28th June 2010).

(iii) Commercial and Industrial construction service in relation to airport is excluded from service tax, in the definition itself. As such services would now be classified as ‘airport service’ when provided wholly within the airport, exclusion has been now provided by way of an exemption notification (Refer Notification No. 42/2010-Service tax, dated the 28th June, 2010)

(iv) Construction of ports was not excluded under the erstwhile definition from exclusion similar to that was available for airports. To bring parity in this matter, commercial and industrial construction service provided within the port area, in relation to construction, repair, alteration,omega replica watches renovation of wharves, quays, docks, stages, jetties, piers and railways is exempt from the whole of service tax (Refer Notification No. 38/2010-Service Tax, dated the 28th June 2010).

(v) Currently abatements are available to certain services such as ‘Renting of a cab’, 'Erection, Commissioning & Installation Service’, ‘Goods Transport Agency service’ and ‘construction services’. Similar abatements would be available to such services, when provided wholly within an airport or a port or other port, under the new definition of airport or port or other port services. (Notification No. 40/2010-ST dated 28th June, 2010 as corrected by corrigendum dated 30th June, 2010 and Notification no. 43/2010-ST, dated 28th June, 2010)

(vi) Exemptions/exclusions are available to warehousing of agriculture products and cold storage facilities under 'Storage & Warehousing Service, transport of export goods in an aircraft by an aircraft operator and site formation and clearance, excavation and demolition services etc. when provided in the course of construction Port or airport. These benefits would continue to be available when such services are provided wholly within port/airport and are classified under port/ airport service (Refer Notification No. 41/2010-ST, dated 28th June, 2010).

Therefore, by amendment provided under Finance Act 2010, all other services carried out within a port or other port or an airport would be subjected to service tax under the category of port / other port / airport services.



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Case Laws Related

  • STO 2013 CESTAT 599
  • Classification: Services received from abroad prior to 18.4.2006: Irrespective of the dispute of classification, any demand prior to 18.4.2006 for services received from abroad prior to 18.4.2006 not sustainable.

  • STO 2013 CESTAT 178
  • Stay: C&F Agent Service: Business Auxiliary Service: Overlapping of period in the identical OIO in the case of same assessee which is pending decision before Tribunal, in that case services classified under BAS and in the present demand service classified under C&F: Stay granted.

  • STO 2013 CESTAT 184
  • Classification: Authority mis-interpreted the classification of goods rendered by Larger Bench: Matter remanded.

  • STO 2013 CESTAT 62
  • Service Tax: Demand: Stay: whether the activity of designing, manufacturing, commissioning and testing of signaling system and telecom systems for the railways would attract service tax or not: Contrary decisions: Stay granted.

  • STO 2013 CESTAT 129
  • Demand: Respondents providing bed rolls in train: Service treated as Support Service of Business: Commissioner (A) changed the service to Business Auxiliary Service: Department seeking stay against Order passed by Commissioner (A): Stay rejected as the Commissioner (A) has upheld the demand of service tax, interest and penalties.

  • STO 2012 CESTAT 318
  • Classification: Product classified as “fertilizer” by the appellants, Revenue intends to classify it as “plant growth regulator”: Appellants did not bring evidence to show parity between their product & the product manufactured by another manufacturer in whose case Commissioner (Appeals) upheld classification of the product as “fertilizer”: Pre deposit ordered.

  • STO 2009 CESTAT 1501
  • Service Tax: Activity of supplying rigs and drilling of wells whether amount to services under "Survey and Exploration of Minerals": Scope: The issue involved in this appeal is highly debatable one. The issue is regarding whether the activity of appellant would fall under the category of "survey and exploration of minerals" during the period 10/9/2004 to 18/4/2006 needs to be gone into detail; as location of well and other issues needs detailed appreciation of records and evidences. This will require time and it can be done only at the time of final hearing. Applicant has not made out prima-facie case for complete waiver(Para 4).

    Pre-deposit ordered.





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