Landmark Service Tax Judgment - Business Auxiliary Services 

According to Section 65 (105) (zzb), any service provided or to be provided to a client, by any person in relation to business auxiliary service is a ‘taxable service’.

According to Section 65 (19), ‘business auxiliary service’ means any service in relation to-

(i) Promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) Promotion or marketing of service provided by the client; or

(iii) Any customer care service provided on behalf of the client; or

(iv) Procurement of goods or services, which are inputs for the client; or

Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods or services intended for use by the client;

(v) Production or processing of goods for, or on behalf of, the client; or

(vi) Provision of service on behalf of the client; or

(vii) A service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision,

and includes services as a commission agent, but does not include any activity that amounts to “manufacture” within the meaning of clause (f) of Section 2 of the Central Excise Act, 1944

Explanation - For the removal of doubts, it is hereby declared that for the purposes of this clause, —

(a) ”commission agent” means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person

(i) deals with goods or services or documents of title to such goods or services; or

(ii) collects payment of sale price of such goods or services; or

(iii) guarantees for collection or payment for such goods or services; or

(iv) undertakes any activities relating to such sale or purchase of such goods or services;

(b) “excisable goods” has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944 (1 of 1944);

(c) “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944);

Services provided in relation to promotion or marketing of service provided by the client is leviable to Service Tax under business auxiliary service. Marketing or promotion means activities which are directed towards furtherance of sale.

Organization and selling of lotteries are globally treated as supply of service. Lotteries (Regulation) Act, 1998 enables State Governments to organize, conduct or promote lotteries. Lottery tickets are printed by the State governments and are sold through agents or distributors. Tickets are delivered by the State Government to the distributors at a discounted price as compared to the face value of the tickets. Service provided by the distributors or agents in relation to promotion or marketing of lottery tickets are leviable to Service Tax. Lotteries fall under the category of games of chance. Games of chance are known under various names like lottery, lotto, bingo etc. and are also conducted through internet or other electronic networks.

Activities relating to procurement of inputs, production of goods (not amounting to manufacture) or provision of services on behalf of a client is included in Business Auxiliary Service. Thus, the procurements of input, capital goods or input services as defined in the CENVAT Credit Rules, by any person for a client i.e. a person producing goods or providing services would be now taxable under this category. Explanation to Section 65(19)(iv) “inputs” means all goods or services intended for use by the client. Thus, it has very wide scope for levying Service Tax.

Commission agent: As per the definition of Business Auxiliary services, services as commission agent are considered Business Auxiliary services. Commission person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person (i) deals with goods or services or documents of title to such goods or services; or (ii) collects payment of sale price of such goods or services; or (iii) guarantees for collection or payment for such goods or services; or (iv) undertakes any activities relating to such sale or purchase of such goods or services.

As regards the question whether Insurance agents, Clearing and Forwarding agents working on commission basis fall under the definition of business auxiliary service, it is clarified that they do not, as they are specifically covered within the definition of other specified taxable services, namely the Insurance service and Clearing and Forwarding Service respectively. Under Section 65A of Finance Act 1994, it has also been provided that in case of overlap, a service would be classified under the head, (a) which provides most specific description, (b) in case of a composite service having combination of different taxable services, the service which give them their essential character and (c) in case the test of (a) and (b) does not resolve, the service which comes earlier in the clauses of Section 65, i.e. the service that was subjected to Service Tax earlier. Since, Insurance services and Clearing and Forwarding Services are more specific description and were also subjected to Service Tax prior to imposition of tax on business auxiliary service, the insurance agents, Clearing and Forwarding agents working on commission basis would fall under those respective categories. From this, it follows that a particular service can be taxed only under one head of service.

It is not possible to give an exhaustive list of business auxiliary services, the following are illustrations of services that are covered under this category viz. evaluation of prospective customers, processing of purchase orders, customer management, information and tracking of delivery schedules, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, managing distribution & logistics. The services provided in relation to getting a customer, verification of prospective customer, processing of purchase order etc would also be covered under Service Tax.

Service Tax on Job Work:

The activity of production or processing of goods for, or on behalf of, the client either amounts to manufacture or it amounts to Job work. According to Section 65 (19) business auxiliary services does not include any activity that amounts to manufacture. This exclusion is given to avoid double taxation on same product. Manufacture attracts levy of Excise duty, thus the production or process which does amount to manufacture is excluded from levy of Service Tax.

Manufacture has been defined u/s 2(f) of Central Excise Act, 1944.
“Manufacture” includes any process, -

(i) incidental or ancillary to the completion of a manufactured product;

(ii) which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or

(iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer. “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;

The definition of Job Worker is given in CENVAT Credit Rules 2004.
According to Rule 2(n) of the said rules, "job work" means processing or working upon of raw material or semi-finished goods supplied to the job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for aforesaid process and the expression "job worker" shall be construed accordingly. In common parlance “Job worker” is a person who is engaged in the production or manufacture of excisable goods on account of other person.

Previously Job Workers used to claim that any process performed by them is not a manufacture to avoid levy of Excise Duty, but now, production of goods on behalf of the client is leviable to Service Tax under ‘Business Auxiliary Service’ if such production activity does not amount to manufacture. So, if process amounts to manufacture the duty of Excise will be levied and if it does not amount to manufacture the Service Tax can be levied.

Position from 01-03-2005

Notification 8/2005-ST dated 01-03-2005 exempts the taxable service of production or processing of goods for, or on behalf of, the client, from Service Tax. Exemption can be availed only if (a) goods are produced using raw materials or semi-finished goods supplied by the client and goods so produced are returned back to the said client (b) for use in or in relation to manufacture of any goods falling under the First Schedule to the Central Excise Tariff Act, 1985, (c) on which appropriate duty of excise is payable.

Explanation – (1) Production or processing of goods does not amount to manufacture as defined in 2(f) of Central Excise Act 1944 (2)“appropriate duty of excise” shall not include ‘Nil’ rate of duty or duty of excise wholly exempt.

(a)  Small service providers whose aggregate value of taxable services rendered in the previous year has not exceeded the limit of Rs. 10,00,000/-  (Service Tax Notification No. 8/2008-ST dated 01.03.2008)

(b)  Services provided to the United Nations or International Organisations

(c)  Services provided to Special Economic Zones (SEZ) units (including unit under construction) and SEZ developers

(d)  Services which are exported as per ‘Export of Services’ Rules

(e)  Services provided for official or personal use of foreign diplomatic missions and family members of diplomatic missions.

(f)  Services provided to Reserve Bank of India

(g)  Out of total value of service provided proportionate value of goods and material provided by the Service Provider

1. Services in relation to agriculture, printing, textile processing or education which consisted of

a) procurement of goods or services, which are inputs for the client; or

b) production or processing of goods for, or on behalf of, the client; or

c) provision of service on behalf of the client; or

d) service incidental or auxiliary to any activity specified in sub-clauses (a) to (c) were exempted whether provided by a company, cooperative society or a partnership firm.

2. Abatement of 30% is available when Business Auxiliary Service is provided in relation to production or processing of parts and accessories used in the manufacture of cycles, cycle rickshaws and hand-operated sewing machines, for, or on behalf of, the client subject to the condition that gross amount charged from the client is inclusive of the cost of inputs and input services, whether or not supplied by the client. Thus, effective rate of duty will be charged on 70% of taxable value.

3. Taxable service provided by a person, having his place of business, fixed establishment, permanent address or usual place of residence, in a country other than India, and which is received by a hotel located in India, in relation to booking of an accommodation in the said hotel, for a customer, who has his place of business, fixed establishment, permanent address or usual place of residence, in a country other than India, is exempt from the whole of the Service Tax. Here, expression "hotel" means a place that provides boarding and lodging facilities to public on commercial basis.

4. Processes outsourced in gem and jewellery sector which amount to 'manufacture' within the scope of Section 2(f) of the Central Excise Act, 1944 would not be liable to Service Tax. As production of goods on behalf of the client is leviable to Service Tax under 'Business Auxiliary Service' only if such production activity does not amount to manufacture.

Service Tax Notification No. 25/2004-S.T. Dated 10/09/2004

Service Tax Notification No. 13/2003-S.T. Dated 20/06/2003

Service Tax Notification No. 14/2008-ST dated 01-03-2008 Exemption Notification

Service Tax Notification No. 23/2006-ST dated 02-06-2006 Exemption Notification

Commissioner of Central Excise Pune – III Vs Shankar Ramchandra Auctioneers (STO 2009 CESTAT 836)