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.

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.

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. ] 

(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. 

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.