TRADING OF GOODS – A SERVICE?

[Mr. M. GOVINDARAJAN]

Before the introduction of negative regime, the term ‘exempted services’, in CENVAT Credit Rules, 2004 is defined as taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken.   The explanation to the said rule provides that "exempted services" includes trading. The said rule has been substituted and the term ‘exempted services’ has been defined as-

• taxable service which is exempt from the whole of the service tax leviable thereon; or
• service, on which no service tax is leviable under section 66B of the Finance Act; or
• taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken;
  

but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.

Section 66B of the Finance Act, 1994 provides that there shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

Section 66D (e) provides that the negative list comprises of trading of goods. The term ‘trading’ has not been defined in the Finance Act, 1994.

Section 65 B(25) defines the term ‘goods’ as every kind of movable property other than actionable claim 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 the contract of sale. The terms ‘actionable claim’ have been defined by Section 65B(1) as having the meaning assigned to it in section 3 of the Transfer of Property Act, 1882; The term ‘money’ has been defined by Section 65B(33) as Indian legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any such similar instrument when used as consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value; Section 65B(43) defines the term ‘securities’ as the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956;

In regard to ‘trading of goods’ the Board made certain clarifications in ‘Education Guide’ as detailed below:

Would activities of a commission agent or a clearing and forwarding agent who sells goods on behalf of another for a commission be included in trading of goods?

No. The services provided by commission agent or a clearing and forwarding agent are not in the nature of trading of goods. These are auxiliary for trading of goods. In terms of the provision of clause (1) of section 66F reference to a service does not include reference to a service used for providing such service. (For guidance on clause (1) of section 66F please refer to Guidance Note 9) Moreover the title in the goods never passes on to such agents to come within the ambit of trading of goods.

Would future contracts in commodities be covered under trading of goods?

Yes. Futures contracts would be covered under trading of goods as these are contracts which involve transfer of title in goods on a future date at a pre-determined price.

Would commodity futures be covered under trading of goods?

Yes. In commodity futures actual delivery of goods does not normally take place and the purchaser under a futures contract normally offsets all obligations or closes out by selling an equal quantity of goods of the same description under another contract for delivery on the same date. There are, therefore, two contracts of sale/purchase involved which would fall in the category of trading of goods.

Would auxiliary services relating to future contracts or commodity futures be covered in the negative list entry relating to trading of goods?

No. Such services provided by commodity exchanges clearing houses or agents would not be covered in the negative list entry relating to trading of goods.”

If ‘trading of goods’ is exempted each output service provider and manufacturer of final products is to intimate this availing of this exemption to the Central Excise Department.   Further the output service provider or manufacturer of final products is to comply with the provisions of Section 6 of CENVAT Credit Rules, 2004 as detailed below:

Rule 6(2) provides that where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for-

          (a) the receipt, consumption and inventory of inputs used-

                (i) in or in relation to the manufacture of exempted goods;

                (ii) in or in relation to the manufacture of dutiable final products excluding exempted goods;

                (iii) for the provision of exempted services;

                (iv) for the provision of output services excluding exempted services; and

           (b) the receipt and use of input services-

                (i) in or in relation to the manufacture of exempted goods and their clearance up to the place of removal;

                (ii) in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance up to the place of removal;

                (iii) for the provision of exempted services; and

                (iv) for the provision of output services excluding exempted services, and shall take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of clause (a) and input services under sub-clauses (ii) and (iv) of clause (b).                  

Rule 6(3) provides that manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, as applicable to him, namely:-

           (i) pay an amount equal to six per cent. of value of the exempted goods and exempted services; or

            (ii) pay an amount as determined under sub-rule (3A); or

            (iii) maintain separate accounts for the receipt, consumption and inventory of inputs , take CENVAT credit only on inputs under sub clauses (ii) and (iv) of said clause (a) and pay an amount as determined under sub-rule (3A) in respect of input services. The provisions of sub-clauses (i) and (ii) of clause (b) and sub clauses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment.

Rule 6(3A) provides that for determination and payment of amount payable under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely:-

(a)  while exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely:-

(i)   name, address and registration No. of the manufacturer of goods or provider of output service;

(ii)  date from which the option under this clause is exercised or proposed to be exercised;

(iii) description of dutiable goods or output services;

(iv) description of exempted goods or exempted services;

(v)  CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under this condition;

(b)  the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month,-

(i)   the amount equivalent to CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, denoted as A;

(ii)  the amount of CENVAT credit attributable to inputs used for provision of exempted services (provisional)= (B/C) multiplied by D, where B denotes the total value of exempted services provided during the preceding financial year, C denotes the total value of dutiable goods manufactured and removed plus the total value of output services provided plus the total value of exempted services provided, during the preceding financial year and D denotes total CENVAT credit taken on inputs during the month minus A;

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods and their clearance up to the place of removal] or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month;

(c)  the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:-

(i)   the amount of CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to manufacture of said exempted goods, denoted as H;

(ii)  the amount of CENVAT credit attributable to inputs used for provision of exempted services = (J/K) multiplied by L, where J denotes the total value of exempted services provided during the financial year, K denotes the total value of dutiable goods manufactured and removed plus the total value of output services provided plus the total value of exempted services provided, during the financial year and L denotes total CENVAT credit taken on inputs during the financial year minus H;

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods and their clearance up to the place of removal or provision of exempted services = (M/N) multiplied by P, where M denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, N denotes total value of output and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and P denotes total CENVAT credit taken on input services during the financial year;

(d)  the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per condition (c) and the aggregate amount determined and paid as per condition (b), on or before the 30^th June of the succeeding financial year, where the amount determined as per condition (c) is more than the amount paid;

(e)  the manufacturer of goods or the provider of output service, shall, in addition to the amount short-paid, be liable to pay interest at the rate of twenty-four per cent. per annum from the due date, i.e., 30^th June till the date of payment, where the amount short-paid is not paid within the said due date;

(f)   where the amount determined as per condition (c) is less than the amount determined and paid as per condition (b), the said manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit of such amount;

(g)  the manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, as per condition (d) and (f) respectively, the following particulars, namely:-

(i)   details of CENVAT credit attributable to exempted goods and exempted services, month wise, for the whole financial year, determined provisionally as per condition (b),

(ii)  CENVAT credit attributable to exempted goods and exempted services for the whole financial year, determined as per condition (c)

(iii) amount short paid determined as per condition (d), along with the date of payment of the amount short-paid,

(iv) interest payable and paid, if any, on the amount short-paid, determined as per condition (e), and

(v)  credit taken on account of excess payment, if any, determined as per condition (f);

(h)  where the amount equivalent to CENVAT credit attributable to exempted goods or exempted services cannot be determined provisionally, as prescribed in condition (b), due to reasons that no dutiable goods were manufactured and nooutput service was provided in the preceding financial year, then the manufacturer of goods or the provider of output service is not required to determine and pay such amount provisionally for each month, but shall determine the CENVAT credit attributable to exempted goods or exempted services for the whole year as prescribed in condition (c) and pay the amount so calculated on or before 30^th June of the succeeding financial year.

(i)   where the amount determined under condition (h) is not paid within the said due date, i.e., the 30^th June, the manufacturer of goods or the provider of output service shall, in addition to the said amount, be liable to pay interest at the rate of twenty four per cent. per annum from the due date till the date of payment.

The issue to be discussed now is whether trading of goods is service. The normal meaning of trading is purchasing goods and selling the same to the consumers. The goods sold may attract VAT or not. But it will not come under the definition of ‘service’.   In trading of goods the ownership of the goods passed on to the consumer.   The goods are sold for consideration.   But there is no consideration for service. If ‘trading of goods’ amounts to service VAT as well as service tax are to be paid which is against to the law. As such ‘trading of goods’ will not amount to service in the opinion of the author.

Views of the experts are solicited.