1. Background

   In addition to bringing 13 new categories of taxable services in the tax net with effect from 10th September, 2004, scope of two very important existing categories viz. "Business Auxiliary Service" and "Banking and Other Financial Services" was substantially expanded by Finance (No.2) Act, 2004.

   This scope expansion has generated lot of interest, as its impact is felt not only by businesses but also by the common man in the remote rural area of the country who walks into a small branch of a nationalized bank and buys a demand draft. In addition to the CFOs and CEOs, Boards of Directors have also started taking interest in service tax law, as these two categories are at the core of every business entity. In this article, we will discuss some important aspects of these two taxable categories.
    

2. Business Auxiliary Service (BAS)²

   1. This category was brought into the tax net from 1st July, 2003 when its coverage was predominantly on the ‘sale and marketing’ side of the business viz:

      1. ‘promotion or marketing or sale of goods produced or provided by or belonging to the client’

      2. ‘promotion or marketing of services provided by the client’

      3. ‘any customer care service provided on behalf of the client’

      4. ‘any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public relation services’

      and it included a ‘commission agent’ but excluded ‘information technology service’.

      Any services rendered by a ‘commercial concern’ to a client in relation to the foregoing activities, was covered under this category until 9th September, 2004.

      From 10th September, 2004, scope of BAS has been expanded to cover the ‘procurement and production (or provision of service)’ side of the business, thereby engulfing whole lot of business activities. In particular, the following new sub-categories are now covered under BAS:

      1. procurement of goods or services, which are inputs for the client

      2. production of goods on behalf of the client

      3. provision of service on behalf of the client

      Further, the incidental or auxiliary support services described in clause (iv) above are now re-defined as under, thereby restricting the scope to cover only such activities which are incidental or auxiliary to the sub-categories (i), (ii) & (iii) and (a), (b) & (c) reproduced above:

      "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".

      Also, it is specifically provided that any activity that amounts to "manufacture" within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 is excluded from the purview of BAS.

      In the subsequent paras, implications of the sub-categories listed at (a), (b) and (c) above are discussed.
       

   2. ‘Commercial concern’ – does it cover ‘individuals’?

      The term ‘commercial concern’ is not been defined in the service tax law. However, from various clarifications given by CBEC3 in the context of some other categories of services like construction service, commercial coaching /training centre and erection, commissioning and installation service, one can take a view that ‘individuals’ who do not have a shop/ establishment/office or any kind of business set up, are not commercial concerns. Hence, even if the services provided by such individuals are of the nature listed in the definition of BAS, they may not attract service tax as they would not be regarded as ‘taxable service’.
       

   3. Procurement of goods or services, which are inputs for the client4

      This sub-category covers various types of service providers who facilitate or co-ordinate the procurement side of a business. The moot question that arises is what meaning should be given to the term ‘inputs ’in the context of ‘goods or services’? CBEC has clarified5 that "procurements of input, capital goods or input services as defined in the CENVAT Credit Rules, …would be now taxable under this category." Hence, the intention is not to cover procurement services for all ‘goods or services’. Also, the term ‘inputs’ should be interpreted in the context of CENVAT Credit Rules, 2004 (CENVAT Rules) and not in its generic sense.

      While the terms ‘inputs’, ‘capital goods’ and ‘input service’ are defined in the CENVAT Rules, one will still have to examine the exact facts in a given case and conclude the coverage or otherwise of the procurement related activity under BAS. For example, if a commercial concern provides service in relation to procurement of collector’s items, say, paintings, the same may not be covered under BAS, as the collector’s item may not be regarded as ‘inputs’ or ‘capital goods’ as defined in the CENVAT Rules.
       

   4. Production of goods on behalf of the client6

      Immediate question that comes to one’s mind is that whether from 10th September, 2004, each and every job work activity is covered under this sub-category of BAS and therefore, whether it is taxable. It is true that if a job-worker (the service provider) who is a commercial concern, is given a mandate by his principal (the client) to carry out ‘production’ on behalf of his principal, such a job-worker would, prima facie, be covered under this sub-category. However, a closer look at the definition of BAS would show that answer to this question is not that simple.

      The Explanation to the definition of BAS provides that any activity that amounts to "manufacture" within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 is excluded from the purview of BAS. Hence, if in a given instance, the activity amounts to ‘manufacture’, that activity would not be taxable under BAS. But if it does not amount to manufacture, further examination of coverage under BAS is required. It is pertinent to note that if the activity amounts to ‘manufacture’, it would not attract service tax under BAS and it is not necessary that the goods manufactured should have suffered Central excise duty.

      It is therefore, critical to understand what is or is not ‘manufacture’ within the meaning under Central Excise Law. The definition of ‘manufacture’ under section 2(f) of Central Excise Act, 1944 is an inclusive definition and it includes any process incidental or ancillary to the completion of a manufactured product as well as any process deemed to be manufacture (e.g., re-packing, re-labelling etc. in specified cases). Also, the Supreme Court7 has interpreted the term ‘manufacture’ as follows:

      "Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."

      (emphasis supplied)

      Based on these principles laid down by the Supreme Court, there are a host of other decisions under the Central Excise Law, throwing light on what is or is not ‘manufacture’ for specific facts in those cases. Courts have also held that merely because some process has been carried out, it is not necessary that a new commodity comes into existence.

      For instance, sawing of marble blocks into marble slabs has been held8 as not amounting to manufacture. The Supreme Court has recently held9 that refining of vegetable oil does not amount to manufacture. Prior to refining, it was raw groundnut oil and after refining even though the characteristic, colour, taste and odour may have changed, it remained groundnut oil. The Court held that there was no manufacture of a new and distinct commodity.

      Does this mean that if an activity is not ‘manufacture’ as defined, it automatically means that it is ‘production’ and therefore, covered under BAS? The answer to this question is not an easy one. The term ‘production’ has not been defined either under the service tax law or under the Central Excise Law. Ordinary dictionary meaning of ‘produce’ is "to bring forth, bring into being or existence – to bring (a thing) into existence from its raw materials or elements. However, the Supreme Court10 has held that "The word ‘production’ has a wider connotation than the word ‘manufacture’. Every ‘manufacture’ can be characterized as ‘production’, but every ‘production’ need not amount to ‘manufacture’." On the other hand, CEGAT (now CESTAT)11 has held that "Production of a commodity would mean, bringing into existence a new commodity which can be brought to the market for being bought and sold having a different name, character and use".

      When it comes to practical situations of different types of job work activities, it becomes extremely difficult to arrive at a final conclusion. For example, slitting/cutting of a jumbo rolls of tissue paper into small sizes for use as napkins etc. was held12 as not amounting to ‘manufacture’, but can one say that it is not ‘production’? Similarly, slicing and packing of pineapples in tins has been held13 as not amounting to ‘manufacture’, but can one say that it is not ‘production’?

      There is an immediate need for the CBEC to issue further clarifications in this regard as until then, diverse views would be taken in similar situations depending on factors like the preparedness of the service provider for litigation, its risk profile and the ability of the service recipient to claim input tax credit.
       

   5. Provision of service on behalf of the client14

      What is covered under BAS is ‘provision of the service on behalf of the client’ and not ‘provision of service to the client’. Had it been the latter one, all the services would have got covered under this sub-category itself and no new category would be required.

      This means that there ought to be three parties involved in a transaction to be regarded as ‘provision of service on behalf of the client’ – one, the commercial concern which provides the service (the service provider, say A); second, the client who engages the service provider to provide service (say B); and third, the person who actually receives/consumes the service (ultimate service recipient, say C). This can be better understood with the help of following examples –

      1. Call Centre A, for a mandate given by Bank B, responds to calls of customer C of Bank B and charges a fee to B for this service. Here, Call Centre A (commercial concern – service provider) provides service on behalf of Bank B (the client) to customer C (the ultimate service recipient).

      2. Bank A which has set up ATMs at various places allows customer C of Bank B to use these ATMs and charges a fee to Bank B. Here, customer C of Bank B uses the ATM facility of Bank A. Thus, Bank A (service provider) provides service on behalf of Bank B (the client) to customer C (the ultimate service recipient).

      In both the above examples, customer C is not the customer of A nor is A providing any service directly to Bank B. Hence, it is not ‘provision of service to the client’ but it is ‘provision of service on behalf of the client’. It is a different case that in view of a specific exemption granted to call centres, in example (ii), service tax would not be attracted.
       

   6. A service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi)15

      This clause has replaced earlier clause (iv) in the definition of BAS. It is now clear that each and every activity listed in this sub-category is not intended to be covered, but only those which are incidental or auxiliary to any activity specified in clauses (i) to (vi) i.e. the activities which are subordinate or supportive to sales, marketing, customer care, procurement or production (provision of service) activities. Further, the words ‘such as’ used in this clause indicate that the listing there is illustrative and not exhaustive.

   7. Exemption from the expanded scope of BAS for individuals etc.

      Notification No. 25/2004-ST dated 10th September, 2004 has granted exemption from service tax for all services in relation to the new sub-categories of BAS introduced from that date, to every commercial concern except the following, unless such commercial concern provides these services in relation to agriculture, printing, textile processing or education:

      1. factory registered under / governed by Factories Act;

      2. company;

      3. partnership firm

      4. society;

      5. co-operative society;

      6. corporation; and

      7. body corporate

      Hence, an individual/HUF having an office/ shop/establishment (other than a factory) and which is therefore, a commercial concern, has been exempted from levy of service tax even if it renders any service in relation to the new sub-categories of BAS.  

3. Banking and Other Financial Services (BFS) [Section 65(12)]
   1. Expansion in types of entities covered under BFS

      Until 9th September, 2004, five specified service providers providing specified BFS services were covered under this category – banking company, financial institution, NBFC, body corporate and forex brokers. From 10th September, 2004, every commercial concern (say, a proprietary firm/partnership firm/ HUF/society/co-operative society/ corporation etc.) providing specified BFS services is covered under this category.
       

   2. Expansion in types of services

      From 10th September, 2004, following further services are covered under BFS:

      "Other financial services, namely:

      –	lending;
      –	issue of pay order, demand draft, cheque, letter of credit and bill of exchange;
      –	providing bank guarantee, over draft facility, bill discounting facility, safe deposit locker, safe vaults;
      –	operation of bank accounts."16

      As a result, most of the core banking activities are now within the ambit of BFS and even a common man who is not in business will be contributing to the national exchequer by way of service tax to be paid to the banking and financial service providers.

      What is, however, surprising is that against an estimated (revised budget) collection of
      Rs. 390 crores from BFS category for the financial year 2003-04, the estimated (budget) collection for 2004-05 (after expansion of BFS category) is lesser at Rs. 377 crores – is it because the Government expects significant CENVAT credit claim by BFS sector?

      As a result of this expansion, many PSU banks which have branches in rural areas and which do not have centralized billing/ accounting, would now require registration under service tax. This is likely to create additional administrative burden for these banks coupled with complexities in claiming input tax credit.
       

   3. Cash Management Service17 – whether really excluded from BFS?

      Clause (v) of the definition of ‘banking and other financial services’ continues to provide that ‘cash management’ is excluded from the scope of BFS. At the same time, new clause (viii) (reproduced above in para 3.2) specifically includes services in relation to issue of pay order/demand draft/cheque and operation of bank account within the scope of BFS. Also, the term ‘cash management’ is not defined in the service tax law.

      On the other hand, the banking industry understands the term ‘cash management’ to include various activities like collection services, payment services and liquidity management services. Many of these services involve issue of pay order/demand draft/ cheque and operation of bank account. Thus, a question which the banking industry is till grappling with is – what are those other activities which can be considered as ‘cash management’ but which are still not covered under BFS? Only a clarification from CBEC would set the matters at rest, as until then, the banking industry is likely to play safe and charge service tax on almost all their core banking activities.
       

   4. Interest on loans/overdrafts etc. and discount on bill discounting etc. not taxable

      In case of existing sub-categories of ‘financial/equipment leasing’ and ‘credit card service’18, CBEC had clarified19 that interest is liable to service tax under BFS. Now that ‘lending’ is a service which is also covered under BFS, one would think that all kinds of interest would be liable to service tax.

      However, the Government has been kind enough and it has decided not to levy service tax on ‘lending’/‘bill discounting’ – Valuation section 67 specifically provides that ‘interest on lending’ will not form part of the value of taxable service (of BFS); and exemption20 has been granted to interest/discount on overdraft/cash credit/bill discounting facility, provided such interest/discount is shown separately in the relevant document. As this exemption was granted by issue of a notification on 22nd September, 2004, question still remains whether such interest/discount would be liable to service tax for the period from 10th September to 21st September, 2004? Going by the intention of the Government, a clarification from CBEC that such interest/ discount would not be taxable, is desirable to avoid possible controversies later.
       

   5. Issue of invoice/bill/challan by BFS service providers to comply with Rule 4A21

      From 10th September, 2004, Rule 4A makes it mandatory for every service provider to issue an invoice/bill/challan containing prescribed particulars. However, in case of BFS service providers, following relaxations have been granted22 in this regard:

      –	any document issued by BFS service providers shall be regarded as an ‘invoice/bill/challan’ for the purposes of Rule 4A
      –	such document need not be serially numbered
      –	such document need not contain address of service recipient

      provided such document contains all the other particulars prescribed in Rule 4A, viz. name address and registration of service provider, name of service recipient, description classification and value of service provided and service tax payable thereon. Thus, even a bank statement could suffice the requirements of Rule 4A. The requirement of signing such document continues to be applicable to BFS service providers, like all other service providers.
       

   6. Exemption from service tax for payments received prior to 10th September, 2004

      In respect of the services brought within the ambit of BFS from 10th September, 2004 (listed in Para 3.2 above), exemption has been granted from service tax to the extent of the value of such service received by the service provider prior to 10th September, 2004. For example, if a bank guarantee was issued on say, 1st January, 2004 for a period of 1 year up to 31st December, 2004 and the bank had already charged a guarantee fee at the time of issuing such guarantee, no part of such fee would be liable to service tax even if part of the guarantee service will be rendered after 10th September, 2004.
       

4. Conclusion

   Levy of service tax is getting expanded every year. From 3 services in 1994, 71 services are now in the net. But these two categories, viz ‘business auxiliary service’ and ‘banking and other financial services’ have many sub-categories and are therefore, in a sense stalwarts of taxable categories of services. Post 10th September, 2004, a quantum leap has been taken by expanding these two categories, which will have far reaching impacts on the pockets of both business consumers as well as ultimate consumers of these services.

© Copyright 2005 VIP Road Chartered Accountants Association
22 Lake Town, Block-B, Kolkata-700089
Website : http://www.vipca.net, Email : info@vipca.net

Site Maintained & Promoted By Kolkatanetonline