BUNDLED SERVICES.

[Mr. M. GOVINDARAJAN]

                        The term ‘Bundled Service’ is defined in the explanation to Section 66F (3) of the Finance Act.  Sec. 66F has been inserted vide Finance Act, 2012 with effect from 01.07.2012.  ‘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.  Section 66F of the Finance Act, 1994 deals with the principles of interpretation of specified descriptions of services or bundled services.  The Education Guide on taxation of services issued by the Department well explained the bundled services.

                      Section 66 F (1) provides that unless otherwise specified, reference to a service shall not include to a service which is used for providing the main service.  For example – ‘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 negative list.

                      Section 66 F(2) provides that 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.  For example – 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 bundled services, where the character could be judged by the service which provides it the essential character.

        According to Section 66 F (3) 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.  Subject to this condition 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.

                      Example for services which are naturally bundled in the ordinary course of business as in Section 66 F (3) (a) – A hotel provides a 4-day/3 nights package with the facility of 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.  Another example – A star hotel is booked for a conference of 100 delegates on a lump sum package with the following facilities-

• Accommodation for the delegates;
• Breakfast for the delegates;
• Tea and coffee during conference;
• Access to fitness room for the delegates;
• Availability of conference room;
• Business centre.

As is evident a bouquet of services is being provided, many of them chargeable to different effective rates of tax.   None of the individual constituents are able to provide the essential character of the service.   However, if the service is described as convention service, it is also to capture the entire essence of the package.   Thus the service may be judged as convention service and chargeable to full rate.   However it will be fully justifiable for the hotel to charge individually for the services as long as there is no attempt to offload the value of one service on to another service that is chargeable at a concessional rate.

                       Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business for which services relate.   Such normal and frequent practice adopted in a business can be ascertained from several indicators some 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 bundle of services;
• 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;

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

                       Example for services which are not naturally bundled in the ordinary course of business as in Section 66 F (3) (b) – 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. taxmanagementindia.com

                       Section 66 F (2) predominates over the provisions laid down in Section 66 F (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.

                       Vide Notification No. 26/2012-ST, dated 20.06.2012 the bundled service by way of supply of food or any other article of human consumption or any drink, in a premises, including hotel, convention center, club, pandal, shamiana or any other place, specially arranged for organizing a function, together with renting of such premises is exempted  from 70%  of the value subject to the condition that CENVAT credit on any goods classifiable under Chapter 1 to 22 of the Central Excise Tariff Act, 1958 has not been taken under the provisions of CENVAT Credit Rules, 2004.  For this purpose the amount charged shall be the sum total of the gross amount charged and the fair market value of all goods and services supplied in or in relation to the supply of good or any other article of human consumption or any drink, whether or not intoxicating, and whether or not supplied under the same contract or any other contract after deducting-

-          The amount charged for such goods or services supplied to the service provider, if any; and

-          The value added tax or sales tax, if any, levied thereon.

The fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.