Classification of Services: Few Issues

[Dr. Sanjiv Agarwal]

There are over 120 taxable services and it is necessary for a service provider to classify the taxable service category in which he falls. This is required for various reasons.

According to Section 65A of the Finance Act, 1994, as inserted by Finance Act, 2003 w.e.f. 14th May, 2003, classification of services has to be done by the service provider on the basis of principles laid down thereunder. However, advance ruling can also be obtained by eligible persons to have a guidance on category of taxable service.

Need for Classification

For services provider who provide a single or multiple services, it is imperative to identify or classify a particular service into its appropriate category for correct levy of service tax in terms of its scope, value, abatement etc. Moreover, classification of any service into the appropriate category is necessary for the following purposes —

(a)  Registration of service provider in appropriate category.

(b) Ascertaining the date of commencement of taxability.

(c)  Knowing the rate of applicable service tax depending upon the date of applicability of service tax on web service.

(d) Claiming exemptions.

(e)  Availing correct abatements.

(f)   Claiming CENVAT Credit in respect of 16 services [Rule 6(5)].

(g)  Claiming rebate/exemption in case of exporters available to specified services.

Section 65A lays down the basic principles of classifying the taxable services. The classification is based on specific description or essential character of the service. If the service cannot be classified on these criteria, classification will be based on sequence of entry of services in section 65(105). Clause 105 of section 65 arranges the taxable services in the order in which they came under the tax net, i.e., on FIFO basis and arranged in alphabetical order. The taxable services which was taxed first is placed above the service which was taxed later. Thus, in case of a confusion or doubt, a service will be classified in the category which was first taxed. For example, there is a service which may fall under mandap keeper, market research, event management or convention service, it would be classified as mandap keeper service because it appears ‘first’ in sub-section (105) of section (65).

Section 65A talks of classification of service under appropriate head of taxable service. Infact, section 65A rescues an assessee when he is not able to decide about the classification.

In any fiscal classification, the onus lies on the Department and the Department has to prove on the basis of cogent evidence on records. Following case laws can be cited for this argument—

(i)                M/s. Sainet Private Ltd. & Others v. UOI 1984 -TMI - 41503 – (HIGH COURT OF JUDICATURE AT BOMBAY)

(ii)             CCE, Nagpur v. Vicco Laboratories 2004 -TMI - 47167 – (SUPREME COURT OF INDIA)

(iii)           CCE, Calcutta v. Sharma Chemical Works 2003 -TMI - 46554 – (SUPREME COURT OF INDIA)

(iv)           M/s. Hindustan Ferodo Ltd. v. CCE, Bombay 1996 -TMI - 44402 – (SUPREME COURT OF INDIA)

(v)             CCE, Bangalore v. Kashyap Engg. & Metallurgical (P) Ltd. 1994 -TMI - 83113 – (CEGAT, NEW DELHI)

(vi)           UOI v. Garware Nylon Ltd. 1996 -TMI - 44318 – (SUPREME COURT OF INDIA)

Service tax can be charged only under a specific category of taxable service and not on any assumption or arbitrary basis. At the same time, merely because there is any dispute or doubt about classification, the taxability of service cannot be vitiated altogether. A person can register himself and pay service tax from any one or more services rendered by him.

New Entry Classification

It is now a settled law that the introduction of a new service or a new taxing entry implies that such service was not covered under an pre-existing taxing entry or service. The new entry will be an extension of the scope of service if service tax is levied out by not carving out a new entry from erstwhile entry. If creation of new entry is not by way of amending the earlier entry, it can be said that there was no earlier entry covering the service sought to be taxed. For proper classification, the intention of the legislature is to the gathered from the language of statutory provisions while introducing the new entry or expending the scope of earlier service.

In Cameo Corporation Services Ltd v. CST, Chennai 2008 -TMI - 30051 – (CESTAT CHENNAI), it was held that when a new category of service is introduced for levy of service tax without amending the definition of a pre-existing category of service in which a given service answering the requisites of a new service is sought to be included by the revenue for the prior period, there can be no levy of service tax in respect of the given service in the pre-existing category, Introduction of a new entry for the purpose of levy of tax presupposes that it was not covered by any of the pre-existing entries. In other words, in the ever widening sphere of service tax, addition of an item to the list of taxable services is just an addition and not a subtraction from a pre-existing entry. [Also see Diebold Systems Pvt Ltd. v. CCE (ST) Chennai 2007 -TMI - 3505 – (CESTAT, CHENNAI); Indian Institute of Quality Assurance, Trichy v. CCE, Trichy (2009) 17 STJ 82 (Cestat, Chennai); BE Gelb Consultancy Services v. CCE, Coimbatore (2009) 14 STR 241 (Cestat, Chennai); Indian Shipowners Association v. Union of India 2009 -TMI - 32747 – (BOMBAY HIGH COURT); Glaxo SmithKline Pharma Ltd. v. CCE (2005) 108 ELT 171 (Cestat, Mumbai; CCE, Chennai v. MRF Ltd 2004 -TMI - 201 - CESTAT (CHENNAI)].

In NCR Corporation India Pvt Ltd. v. CST, Bangalore 2008 -TMI - 30036 – (CESTAT BANGALORE), it was held once a particular service is introduced as a separate category of service from a particular date, then it will have only prospective effect and it can not be said that it was liable to service tax for a prior period under any other category.

However, in Kopran Ltd v. CCE, Raigad 2009 -TMI - 34320 – (CESTAT, MUMBAI), it was held that introduction of new service by carving out from an earlier service will not mean that new service was not taxable under any other category earlier.

Change of Classification by Recipient

It may be noted that nature of service should be same for both service provider and service receiver. The service recipient can not change the classification of the service. Central Excise does not permit such a change. In service tax too, it may not be possible as classification is to be mentioned in invoice. Classification of goods and services is under the jurisdiction officers where service provider or manufacturer is registered. The receiver can not alter the classification. In CCE v. Kinetic Engineering Ltd. (1997) 95 ELT 396 (Cestat, Mumbai), it was held that classification of goods made at the supplier’s and can not be attered. [Also see Sarvesh Refractories Pvt. Ltd v. CCE & C 2007 -TMI - 2610 – (SUPREME COURT OF INDIA)].

Classification of Long term Work Contracts

Works contracts were brought into the service tax net w.e.f. 1.6.2007 but prior to the said date, certain services like construction erection, commissioning or installation repair services etc were classifiable under respective taxable services even if they were in the nature of works contract. On a issue of whether from 1.6.2007, classification of these activities would undergo a change, CBEC has clarified vide Circular No 128/10/2010-ST dated 24.8.2010 that as regards the classification, with effect from 01.06.2007 when the new service ‘Works Contract’ service was made effective, classification of aforesaid services would undergo a change in case of long term contracts even though part of the service was classified under the respective taxable service prior to 01.06.2007. This is because ‘works contract’ describes the nature of the activity more specifically and, therefore, as per the provisions of section 65A of the Finance Act, 1994, it would be the appropriate classification for the part of the service provided after that date. (Readers may refer to Topic No 69 in Volume 2 of the Book).

Airport/Port Services

In case of port services and airport services, divergent practices are followed so far as classification of different services within the port/airport area are concerned. At some places, all services performed in these areas (even when falling under the definition of any other taxable service) are classified under the port or airport service, as the case may be. In some cases, individual services are classified according to their respective individual description on the grounds prescribed under section 65A, ie, adoption of a specific description over general description. In order to consolidate all such services and to have consistent approach in classification, Finance Act, 2010 has amended the definition of port services [section 65(105)(zn, zzl) and airport services [section 65(105)(zzm)] to clarify that all services provided entirely within the port or airport premises would fall under these services only. A proviso has also been added specifying that the provisions of section 65A shall not apply to any service when the same is rendered wholly within the port/airport or civil enclave.

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