Introduction
The scope of this article is to discuss the nuances of service
tax on the category of ‘Business Auxiliary Services’ (BAS). The Finance
Act, 2003 introduced BAS in the realm of service tax by inserting
section 65(19) in the provisions of the Finance Act, 1994 (FA, 1994).
Section 65(19) of FA, 1994 after the amendment reads as under:
"In this Chapter, unless the context
otherwise requires, –
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(19) ‘business auxiliary service’
means any service in relation to, -
-
promotion or marketing or sale
of goods produced or provided by or belonging to the client; or
-
promotion or marketing of service
provided by the client; or
-
any customer care service provided
on behalf of the client; or
-
any incidental or auxiliary support
service such as billing, collection or recovery of cheques, accounts
and remittance, evaluation of prospective customer and public
relations services, and includes services as a commission agent,
but does not include any information technology service.
Explanation. – For
the removal of doubts, it is hereby declared that for the purposes
of this clause "Information technology service" means any service
in relation to designing, developing or maintaining of computer software,
or computerized data processing or system networking, or any other
service primarily in relation to operation of computer systems;"
Circular No. 59/8/2003 dated June
20, 2003 (F. No. B3/7/2003-TRU) notified 1st July 2003 as the appointed
date for coming into force of the levy of service tax in accordance
with this provision.
Analysis of the provisions
The provisions of section 65(19) of FA, 1994 refer to rendering
of services in relation to goods, services or customer care on behalf
of the client. The provisions generally envisage, therefore, the existence
of at least three parties. The three parties would be the service
provider, his client and the user of the product/ service of the client.
In respect of goods, there could be the manufacturer, the buyer and
the agent. In respect of services e.g., of mobile phone services there
could be the mobile phone company (client), the agency promoting the
mobile phone service (the service provider) and the mobile phone subscriber
(the user of the mobile phone service). A non-tripartite arrangement
would fall outside the scope of BAS. For example, the fee that a chartered
accountant charges to his client, for preparing a loan application
to submit a bank, does not fall within the ambit of BAS. On the other
hand, if a non-banking finance company (NBFC) were to appoint and
remunerate agents to fill in loan applications of their borrowers,
the fee paid by the NBFC to the agent would be within the scope of
BAS.
Section 65(105)(zzb) defines taxable
service in this context to be any service provided to a client, by
a commercial concern in relation to business auxiliary service. The
important thing to note is that the service provider must be a commercial
concern. Therefore, a concern which is not a commercial concern but
is a non-profit organization is not subject to service tax under BAS.
For example, a charitable trust helping destitute women by promoting
sale of sweaters knitted by such destitute women, would not be liable
to charge or pay service tax under BAS.
The Memorandum explaining the provisions
of the Finance Bill, 2003 explained the coverage of BAS as including
launching of products, customer education programmes, help-desk services,
managing front offices and enquiry bureaus. Circular No. 59/8/2003
dated June 20, 2003 (F. No. B3/7/2003-TRU), which notified the appointed
date, gives an illustrative list of the scope of BAS as including
evaluation of prospective customers, processing of purchase orders,
customer management, information and tracking of deliver schedules,
accounting and processing of transactions, operational assistance
for marketing, formulation of customer service and pricing policies,
managing distribution and logistics, getting a customer and verification
of prospective customer. To the extent that Circular 59 goes beyond
the wordings of section 65(19) and gives a go by to the ejusdem
generis principle, the Circular is not valid in law. The provisions
of section 65(19)(iv) should be understood in the context of promotion
or marketing of goods or services. Even the wording of section 65(19)(iv)
which talk of collection, customer evaluation, etc. go to show that
it is essentially marketing field which is to be addressed under BAS.
To interpret section 65(19)(iv) in any other way would eliminate to
have the other services defined in FA, 1994 for in essence all services
have a nexus with the business e.g. lawyers, advertisers, chartered
accountants render services which are incidental to their clients’
businesses or provide ‘auxiliary support’ to their clients’ businesses.
Notification No. 8/2003 – Service
tax dated June 20, 2003 grants exemption from service tax in respect
of a call centre. It must be noted that this exemption is not limited
to the provisions of section 65(19). In this connection, a call centre
is defined as a commercial concern which provides assistance, help
or information through telephone, on behalf of another person. The
definition, therefore, draws a parallel with the concept of three
parties discussed above. One of the questions asked is whether a call
centre doing product promotion or marketing is exempt. In my view,
if the call centre were not doing product/ service promotion or customer
care, it would not be subject to tax under BAS. The exemption, therefore,
has necessarily to relate to call centres doing product/ service promotion
or customer care.
Notification No. 13/2003 – Service
tax dated June 20, 2003 grants exemption from service tax in respect
of commission agents for goods. On the other hand, Circular No. 66/15/2003
dated November 5, 2003 clarifies that the activity of distribution
of mutual fund units is not the same as commission agency for goods
and the activity of distribution of mutual fund units is subject to
service tax under BAS effective from July 1, 2003.
The meaning of the term ‘information
technology service’ as given in the Explanation has the following
segments:
-
designing, developing or maintaining
of computer software;
-
computerized data processing
or system networking; or
-
any other service primarily in
relation to operation of computer systems.
Circular No. 59/8/2003 dated June
20, 2003 (F. No. B3/7/2003-TRU), which notified the appointed date,
explained the scope of ‘information technology services’ and stated
that the mere use of a personal computer or a laptop did not constitute
an information technology service. This was a correct view to take.
Circular No. 62/11/2003 dated August
21, 2003 further clarified what was the meaning of ‘information technology
service’. At Para 2.2 of the Circular, it refers to and quotes from
Letter No. F.No. 334/1/2003-TRU dated February 28, 2003 citing that
" … computer enabled services, namely, data processing, back office
processing, computer facility management shall not be subjected to
service tax". Para 2.3 of the Circular refers to the last phrase in
the Explanation to section 65(19) and takes the view that the back
office processing primarily in relation to operation of computer systems
will not be taxable. It also holds that payroll processing and accounts
management even by using computer programmes is taxable under BAS.
This latter part of the Circular is incorrect as neither payroll processing
nor accounts management is within the scope of section 65(19)(iv).
Section 65(19)(iv) covers within its scope " … billing, collection
or recovery of cheques, accounts and remittance…". The wording of
the section is highly logical in business terms. After the billing
cycle, there is collection and recovery of cheques (both of which
are linked to the marketing activity/ customer care under section
65(19)(i) to (iii). The post sales cycles of collection, sending collection
report, remitting collections made are treated as an integral part
of the sales promotion activity. Similarly, prospective customer evaluation
is the pre-sales portion of services and is rightly covered as taxable
under section 65(19)(iv) and Circular No 59. Circular No. 62 incorrectly
states payroll processing to be taxable.
Circular No. 70/19/2003-ST dated
December 17, 2003 (F.No. 256/9/2003-CX-4) clarifies that ‘annual maintenance
contract’ of software falls within the ambit of information technology
service under BAS and would not be subject to tax under any other
clause and being in the nature of ‘information technology service’
would be excluded from BAS.
One of the issues is whether ‘brand
ambassadors’ or professionals doing modelling for a product would
be covered under BAS. The essence of BAS; i.e., the three-way interface
is certainly missing in pure modelling assignments. A model shoots
a sequence for a product but the footage may never be used at all.
Therefore, a pure modelling arrangement is outside the purview of
BAS. A ‘brand ambassador’ also has limited interface with potential
buyers. The term is more glorified then and carries, perhaps, higher
fees and footage that modelling but is not far removed from modeling.
Though much would depend on the language of the agreement, the ‘brand
ambassador’ also would also be outside the ambit and coverage of BAS.
One of the issues which crops up
in BAS is what is the value of taxable services. The general rules
apply here also. Services rendered free are not subject to any service
tax. Identifiable reimbursements are not in the nature of remuneration
for taxable services and are outside the ambit of service tax. For
example, an NBFC instructs its loan sales agent that the fixed rate
for loans is 12% per annum and the commission to the agent will be
1% of the loan. The agent may request the NBFC to drop the fixed rate
to 11.5% and the NBFC pays the agent 0.5% commission, the service
tax would be payable only on 0.5% commission even if the borrower
subsidy is routed through the agent.
