COMPOSITE AND BUNDLED SERVICES

[Dr. Sanjiv Agarwal]

Prior to Finance Act, 2012 i.e., upto 30th June, 2012, emphasis was mainly on classification of composite services i.e., services where more than one services are provided and which can not be classified on the basis of specific description of taxable service. In such a case, composite service was classified in the category which gave it the essential character and where it was not possible, taxable service was to be classified under that clause of section 65(105) which appeared first amongst those requiring equal consideration on merits.

The word ‘composite’ literally means made up of various parts or elements; a thing made up of several parts or elements; putting together; combining two or more things. On what was the criteria for classification of composite taxable services, readers may refer to erstwhile provisions of section 65A of the Finance Act, 1994.

Literally, ‘bundle’ means a collection of things, or a quantity of material, tied or wrapped together; tie up or roll up a number of things together as though into a parcel.

The word ‘bundle’ has been used for the first time in the Service Tax and it has been interchangeably used with the expression ‘specified descriptions of services’. What is meant by specified descriptions of services has not been defined or explained in the Act.

Explanation to section 66F defines ‘bundled service’ to mean a bundle of provision of various services where is an element of provision of one service is combined with an element or elements of provision of any other service or services.

‘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.

Classification issue Post Finance Act, 2012 (w.e.f. 1-7-2012)

In the post Finance Act, 2012 scenario w.e.f. 1-7-2012, classification of taxable services into categories will no longer be required as it is either a service or not a service. If it is a service, it would be a taxable service if it does not fall under a negative list or an exempted list. This is so because there is no need to classify the services into any specified categories of taxable services.

What will be more important will be to classify an economic activity as a ‘service’ or ‘not a service’. For this purpose, dominant test could be that laid down by Apex Court in BSNL v. Union of India 2006 (3) TMI 1 - Supreme court.

According to section 66F of Finance Act, 1994, as inserted by the Finance Act, 2012 w.e.f. 1-7-2012, it has been provided that unless otherwise specified, reference to a service shall not include reference to a service which is used for providing the main service. This would indicate that input services or ancillary services used in providing main output service would not take the same colour as that of the main service. There could be a main service which is in negative list. It would not imply that other services will also be in the negative list if such services are subject to differential treatment based on their description.

Principles for interpretation of specified description of services

Although the negative list approach largely obviates the need for descriptions of services, such descriptions continue to exist in the following areas –

• In the negative list of services.

• In the declared list of services.

• In exemption notifications.

• In the Place of Provision of Services Rules, 2012

• In few other rules and notifications.

There are two principles laid down which are contained in clauses (1) and (2) of section 66F of the Act.

Summary of provisions in relation to bundled services

In nutshell, the classification/interpretation principles w.e.f. 01.07.2012 are as follows –

• reference to main service will not include reference to a service which is used for providing main service.
• Where a service could be subject to differential treatment for any purpose based on its description, the most specific description will be preferred over more general description (specific would prevail over a general description). (For example, ‘road repair’ would be better understood as ‘repairs to road’ rather than ‘repairs of immovable property’).
• In a bundled service, where various elements of service are naturally bundled in ordinary course of business, it will be treated as a single service which gives such bundled service its essential character. (e.g., event management service for a marriage comprising of venue, mandap, catering, logistics, tour, entertainment etc.; meals and air/rail travel; breakfast with hotel accommodation, boarding school, etc.).
• In a bundled service, if various elements of bundled service are not naturally bundled in ordinary course of business, it shall be treated as single service which results in highest liability of Service Tax, i.e. which yields highest Service Tax revenue to the Government (e.g., service comprising of consulting engineering, construction, erection and commissioning, support services; construction and club membership, dry-cleaning billed as electricity, chemicals, ironing and so on).
• Provisions of section 66F applies -

- where services have to be treated differently, for any reason, and

- for determining the taxability of bundled services.

• CBEC has issued a Guidance Note on Taxation of Service on 20-6-2012 applicable w.e.f. 1-7-2012. Guidance Note No. 7 explains ‘Rule of Interpretations’.

Composite Transactions of Sale of Goods and Services

Mere transfer of title in goods or immovable property by way of sale, gift or in any other manner for a consideration does not constitute service.

The taxability of the transaction would depend on the dominant nature and Pith and substance test.

Goods has been defined in section 65B of the Act as ‘every kind of moveable property other than actionable claims and money; and includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under contract of sale’.

Immovable property has not been defined in the Act. Therefore the definition of immovable property in the General Clauses Act, 1897 will be applicable which defines immovable property to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

‘Transfer of title’ means change in ownership. Mere transfer of custody or possession over goods or immovable property where ownership is not transferred does not amount to transfer of title. For example giving the property on rent or goods for use on hire would not involve a transfer of title.

The word ‘only’ signifies the transactions which involve only transfer of title in goods or immovable property is not included as service. A transaction which in addition to a transfer of title in goods or immovable property involves an element of another activity carried out or to be carried out by the person transferring the title would not be excluded from the definition of service.

So far as composite transactions of transfer of title in goods involving an element of provision of service is concerned, the manner of treatment of such composite transactions for the purpose of taxation, i.e. are they to be treated as sale of goods or provision of service, has been laid down by the Honorable Supreme Court in the case of BSNL v. Union of India 2006 (3) TMI 1 - Supreme court]. The relevant paras 42 and 43 of the said judgment are reproduced below –

“42. Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been Constitutionally permitted in Clauses (b) and (g) of Clause 29A of Art. 366, there is no other service which has been permitted to be so split. For example the clauses of Art. 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.

43. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley’s case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29A) continues to be - did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test.”

The following principles emerge from the said judgment for ascertaining the taxability of composite transactions -

• 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.
• 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.
• 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.

- If the dominant nature of such a transaction is sale of goods or immovable property then such transaction would be treated as such.

- 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.

• 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.
• 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.