Indirect Taxes

Questions & Answers

14th National Tax Convention — 2007 at New Delhi Questions on Service Tax

Q.1 A turnkey contract is an indivisible composite transaction. If a works contract was half-finished on 1-6-2007, is the contractor required to pay tax from this date? If so, how the tax is to be computed, when the starting point is “gross amount charged” for the works contract, which is the entire contract price?

Ans. In case of an indivisible works contract being half finished on 1-6-2007, the proportion of work completed and the corresponding amount would be required to be reduced from the gross amount charged. The balance amount, which represents the amount for the services to be rendered post 1-6-2007 would be liable to Service tax.

In most works contracts particularly turnkey contracts, there are milestones for making payments and therefore, such payments which are received for the work done after 1-6-2007, attract Service tax on the principle of proportionately. In the past, CBEC/MoF has issued circulars taking the same view when new services were introduced making them taxable for the first time.

Q.2 Intellectual property right is goods in general law. Transfer of right to use goods is subject to sales tax/VAT after the 46th Constitution amendment. Therefore, is transferring or permitting the use of or enjoyment of intellectual property right subject to service tax under section 65(105)(zzzr)?

Ans. The position as it stands today is that a temporary transfer of intellectual property; i.e., transfer of right to use intellectual property would be liable to both VAT as well as Service tax. However, in view of the decision of the Supreme Court the case of BSNL vs. Union of India [2006 (2) STR 161 (SC)] a transaction can either be liable to Sales tax or Service tax but not both. The said finding was in the context of transfer of property in goods involved in the execution of works contract whereas the current transaction is in respect of transfer of right to use goods. Till such time the levy of Service tax on intellectual property is struck down by Court, it would be liable to both VAT as well as Service tax.

Q.3 Where a social club is managed by the members themselves through an elected body, the club is governed by the principle of mutuality. Courts have held that such a club is an agent of the members and there cannot be any transaction between the club and its members. Therefore, can the subscription paid by the members to the club be subject to service tax under section 65(105)(zzze)?

Ans. In order to overcome the said decisions, an Explanation was inserted by the Finance Act, 2006 w.e.f. 1-5-2006. The same is reproduced hereunder for ready reference.

Explanation.—For the purposes of this section, taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration.

The Explanation creates a legal fixation and by a deemed provision treats the club and its members as two distinct entities where one is the service provider and the other is a service recipient thereby specifying the basic criteria for levy of Service tax, viz., existence of two separate persons – one being service provider, and other being, service recipient. The above Explanation, however, needs to be tested against the principle of mutuality of interest. The question which requires consideration is whether the principle of mutuality of interest is applicable where the law by legal fixation creates a distinction.

Q.4 A foreign company is rendering service of oil exploration to Indian company over a period of two years. Whether the Indian company is required to pay service tax under rule 2(1)(d)(iv) read with section 66A?

Ans. The taxing entry of survey and exploration of mineral, oil and gas service falls under category 2 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (the Import of Services Rules). Under the said Category 2, services would be liable to Service tax if the same is partly performed in India. The second category is, therefore, ‘performance’ based. Therefore, if the service is wholly performed outside India, it would not be liable to Service tax. However, if it is partly performed in India then it would be liable to Service tax under section 66A read with Rule 2(1)(d)(iv).

The liability to Service tax therefore, depends on the following three factors:

(i) on the contractual relationship;
(ii) place where the service is rendered; and
(iii) the category under which the taxable service is classified under the Import of Services Rules.

Q.5 Notification No. 12/2003-ST provides exemption from service tax to the extent of value of goods “sold”. If sale is a transaction separate from the transaction for rendering service, there is no need for any exemption. If the goods are used for rendering the service (such as repair service), and such goods get transferred to the customer while rendering the service, there cannot be any “sale” of such goods, as there would be a single price for the service. Therefore, in what situation the exemption notification can be invoked?