|Bundled Services [Section 66F]
The negative service tax provisions have been introduced w.e.f. 01.07.2012. The new provisions covers four types of services :-
i. Non-taxable services declared in the Negative List (Section 66 D)
ii. Declared services attracting the levy of Service Tax (Section 66E)
iii. Services enjoying exemption by virtue of a Notification issued under the service tax provisions.
iv. Taxable services confirming to the definition of “service” but not covered under the Negative List or exempted under any notification.
Although the idea of introduction of Negative List in the Service Tax provisions was to do away with the issue of classification of services under different service classification headings, the presence of the above four categories of services in the provisions have not altogether eliminated the classification issues. This has necessitated a need for a mechanism to determine the classification of a service in the above four categories and the manner of taxability of bundled services. Section 66F lays down the principles of interpretation of specified descriptions of services and bundled services.
The guiding principles for classification of bundled services, as enumerated in this section are:-
1. Reference to a main service shall not include reference to a service which is used for providing such service, unless not specified elsewhere in the provisions.
2. The most specific description of a service shall be preferred over a more general description, when such service is capable of differential treatment based on its description.
3. The taxability of a bundled service shall be determined in the following manner, namely:
(a) if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character.
(b) if various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax.
1. What is the scope of the clause (1) of section 66F: ‘Unless otherwise specified, reference to a service (hereinafter referred to as the “main service”) shall not include reference to a service which is used for providing the main service’
This rule can be best understood with a few illustrations which are given below -
♦ ‘Provision of access to any road or bridge on payment of toll’ is a specified entry in the negative list in section 66D of the Act. Any service provided in relation to collection of tolls or for security of a toll road would be in the nature of service used for providing such specified service and will not be entitled to the benefit of the negative list entry.
♦ Transportation of goods on an inland waterway is a specified entry in the negative list in section 66D of the Act. Services provided by an agent to book such transportation of goods on inland waterways or to facilitate such transportation would not be entitled to the negative list entry.
2. What is the scope of clause (1) of section 66F: ‘where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description’.
This rule can also be best understood with some illustrations which are given below -
♦ The services provided by a real estate agent are in the nature of intermediary services relating to immovable property. As per the Place of Provision of Service Rule, 2012, the place of provision of services provided in relation to immovable property is the location of the immovable property. However in terms of the rule 5 pertaining to services provided by an intermediary the place of provision of service is where the intermediary is located. Since Rule 5 provides a specific description of ‘estate agent’, the same shall prevail.
♦ Pandal and Shamiana is an existing service and will remain a subject of taxation. Likewise service provided by way of catering is a taxable service and entitled to abatement. There is abatement when the two are provided in combination. Since the combination is more a specific entry than the two provided individually, there is no need to apply the later rule of bundled services, where the character could be judged by the service which provides it the essential character.
3. How is the taxability of ‘bundled services’ determined?
‘Bundled service’ means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of ‘bundled service’ would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.
Two rules have been prescribed for determining the taxability of such services in clause (3) of section 66F of the Act. These rules, which are explained below, are subject to the provisions of the rule contained in sub section (2) of section 66F, viz a specific description will be preferred over a general description.
4. Which are the services that are naturally bundled in the ordinary course of business?
The rule is – ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’
♦ A hotel) provides a 4-D/3-N package with the facility of breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.
♦ A 5 star hotel is booked for a conference of 100 delegates on a lump sum package with the following facilities:
• Accommodation for the delegates
• Breakfast for the delegates,
• Tea and coffee during conference
• Access to fitness room for the delegates
• Availability of conference room
• Business centre
As is evident a bouquet of services is being provided, many of them chargeable to different effective rates of tax. None of the individual constituents are able to provide the essential character of the service. However, if the service is described as convention service it is able to capture the entire essence of the package. Thus the service may be judged as convention service and chargeable to full rate. However it will be fully justifiable for the hotel to charge individually for the services as long as there is no attempt to offload the value of one service on to another service that is chargeable at a concessional rate.
5. Which are the services that are not naturally bundled in the ordinary course of business?
The rule is – ‘If various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall be treated as provision of a service which attracts the highest amount of service tax.’
♦ A house is given on rent one floor of which is to be used as residence and the other for housing a printing press. Such renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore, if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of service tax. In this case renting for use as residence is a negative list service while renting for non-residence use is chargeable to tax. Since the latter category attracts highest liability of service tax amongst the two services bundled together, the entire bundle would be treated as renting of commercial property.
6. What is the significance of the condition that the rule relating to ‘bundled service’ is subject to the provisions of sub-section (2) of section 66F ?
Sub-section (2) of section 66 lays down : ‘where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description’ (refer para 7.1.2 above). This rule predominates over the rule laid down in sub-section (3) relating to ‘bundled services’. In other words, if a bundled service falls under a service specified by way of a description then such service would be covered by the description so specified.
7. What is the manner of determining if the services are bundled in the ordinary course of business ?
Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below -
♦ The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package then such a package could be treated as naturally bundled in the ordinary course of business.
♦ Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
♦ The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
♦ Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business are -
• There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
• The elements are normally advertised as a package.
• The different elements are not available separately.
• The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.
No straight jacket formula can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors some of which are outlined above.
8. What are the factors to be considered for ascertaining the taxability of composite transactions ?
a. Except in cases of works contracts or catering contracts [exact words in article 366(29A) being – ‘service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service’] composite transactions cannot be split into contracts of sale and contracts of service.
b. The test whether a transaction is a ‘composite transaction’ is that did the parties intend or have in mind that separate rights arise out of the constituent contract of sale and contract of service. If no then such transaction is a composite transaction even if the contracts could be disintegrated.
c. The nature of a composite transaction, except in case of two exceptions carved out by the Constitution, would be determined by the element which determines the ‘dominant nature’ of the transaction.
i. If the dominant nature of such a transaction is sale of goods or immovable property then such transaction would be treated as such.
ii. If the dominant nature of such a transaction is provision of a service then such transaction would be treated as a service and taxed as such even if the transaction involves an element of sale of goods.
d. In case of works contracts and ‘service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service’ the ‘dominant nature test’ does not apply and service portion is taxable as a ‘service’ This has also been declared as a service under section 66E of the Act.
e. If the transaction represents two distinct and separate contracts and is discernible as such then contract of service in such transaction would be segregated and chargeable to service tax if other elements of taxability are present. This would apply even if a single invoice is issued.
The principles explained above would, mutatis mutandis, apply to composite transactions involving an element of transfer of title in immovable property Section 66 F.