SPECIFIED DESCRIPTION OF SERVICES (BUNDLED SERVICES)

[Dr. Sanjiv Agarwal]

The Finance Act, 2012 has made a paradigm shift in focus of Service Tax with introduction of negative list approach to replace selective positive list approach to taxation of services inIndia. Consequently, section 65 A which dealt with classification of taxable services shall not apply w.e.f. 1.7.2012 and cease to exist on the statute as the classification of services may no longer be required for the purpose of Service Tax.

However, in order to arrive at correct and appropriate reference to a service, Finance Act, 2012 has inserted a new provision in section 66F w.e.f a 1.7.2012 to provide for principles of interpretation of specified descriptions of services or bundled services.

Section 66F Principles of Interpretation of Specified Description of Services or Bundled Services

66F. (1) Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service.

(2) Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.

(3) Subject to the provisions of sub-section (2), the taxability of a bundled service shall be determined in the following manner, namely:––

(a) if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character;

(b) if various elements of such service are not naturally bundled in the ordinary course of

business, it shall be treated as provision of the single service which results in highest liability of service tax.

Explanation.— For the purposes of sub-section (3), the expression "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.’;

Thus, the erstwhile classification principles have been made ineffective and new classification (interpretation) principles stipulated for composite service or bundled services as follows –

(a)    Reference to main service cannot be used for services used for providing the main service

(b)    Bundle of service is a bundle of provision of more than one or more 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.

(c)    Where services are naturally bundled in the ordinary course of business then such services would be treated as one service and would be classified based on the essential character of services rendered.

(d)    Where services are not naturally bundled in the ordinary course of business, then such services shall be treated as provision of the single service which results in highest liability of Service Tax to the assessee.

Composite and Bundled Services

Prior to Finance Act, 2012, emphasis was mainly on classification of composite services i.e., services where more than one services are provided and which cannot 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.

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 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 services 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

In the post Finance Act, 2012 scenario, 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 (SC)].

According to section 66F of Finance Act, 1994, as inserted by the Finance Act, 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 Service 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.

Reference to main service not to  include reference to service used for providing main service

This rule can be best understood with few illustrations which are given below –

• ‘Provision of access to any road or bridge on payment of toll’ is a specified entry in the negative list in section 66D of the Act. Any service provided in relation to collection of tolls or for security of a toll road would be in the nature of service used for providing such specified service and will not be entitled to the benefit of the negative list entry.
• Transportation of goods on an inland waterway is a specified entry in the negative list in section 66D of the Act. Services provided by an agent to book such transportation of goods on inland waterways or to facilitate such transportation would not be entitled to the negative list entry.

Most specific description to be preferred over more general description for service capable of deferential treatment for any purpose based on its description 

This rule can also be best understood with few illustrations which are given below –

• The services provided by a real estate agent are in the nature of intermediary services relating to immovable property. As per the proposed Place of Provision of Service Rule, 2012, the place of provision of services provided in relation to immovable property is the location of the immovable property. However in terms of the rule 5 pertaining to services provided by an intermediary the place of provision of service is where the intermediary is located. Since Rule 5 of the draft ‘Place of Provision of Services Rules, 2012’ provides a specific description of ‘estate agent’, the same shall prevail.

• Pandal and Shamiana is an existing service and will remain a subject of taxation. Likewise service provided by way of catering is a taxable service and entitled to abatement. There is abatement when the two are provided in combination. Since the combination is more a specific entry than the two provided individually, there is no need to apply the later rule of bundled services, where the character could be judged by the service which provides it the essential character.

Naturally bundled services in ordinary course of business

The rule is – ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’

Illustration

• A 5-star hotel in Gurgaon (Haryana) provides a 4-Day/3-Night package with the facility breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.

Manner of determining if the services are bundled in the ordinary course of business

Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators few of which are listed below –

• The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package then such a package could be treated as naturally bundled in the ordinary course of business.
• Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
• The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main  service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For example service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
• Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business are –

• There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
• The elements are normally advertised as a package.
• The different elements are not available separately.
• The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.

No straight jacket formula can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors some of which are outlined above.

Services not naturally bundled in ordinary course of business

The rule is – ‘If various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall be treated as provision of a service which attracts the highest amount of service tax.’

Illustration

A house is given on rent one floor of which is to be used as residence and the other for housing a printing press. Such renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore, if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of service tax. In this case renting for use as residence is a negative list service while renting for non-residence use is chargeable to tax. Since the latter category attracts highest liability of service tax amongst the two services bundled together, the entire bundle would be treated as renting of commercial property.

Sub-section (2) of section 66 lays down : ‘where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description’ (refer para 7.1.2 above). This rule predominates over the rule laid down in sub-section (3) relating to ‘bundled services’. In other words, if a bundled service falls under a service specified by way of a description then such service would be covered by the description so specified. The illustration, relating to a bundled service wherein a pandal and shamiana is provided in combination with catering service, given above explains the operation of this rule.