The
Delhi HC in a recent decision examined the issue of applicability of service tax
on the services rendered by the foreman in a business chit fund under the new
service tax regime effective from July 1, 2012
and in
this regard undertook a detailed examination of the definition of “Service”.
This being the first instance where an issue under the new service tax regime
has been analyzed by a judicial forum of the stature of a High Court, the
observations and the approach adopted by the Delhi HC assumes immense
significance
Facts of
the case:
·
Delhi
Chit Fund Association (‘Petitioners’), a group of chit fund companies in Delhi,
filed a writ petition in the HC challenging the validity of the Notification No
26/2012-ST dated June 20,2012 (‘the Notification’)
·
Serial
No. 8 of the Notification provided partial exemption to the extent of 30
percent of the consideration received for services rendered in relation to chit
funds; thereby taxing the remaining consideration
·
However,
the Petitioners were of the view that the services provided by a foreman in
connection with the chit fund business were not taxable in terms of the
definition of ‘service’ as provided under Section 65B (44) of the Finance Act,
1994 (“Finance Act”)
Issue:
The
question of determination before the HC was whether the services of a foreman
(the person managing the operations of a chit fund) offered in relation to
conducting a chit business is a taxable service for the purpose of section
65B(44) Finance Act wef July 1,2012
Contentions
of the Petitioner:
The
Petitioner relied on the following legal grounds to support the argument that
the services provided by a foreman in connection with the chit fund business are
not chargeable to service tax:
·
Section
65B (44) of the Finance Act defines ‘service’ as an activity carried out by a
person for another person for consideration. However, a transaction in money is
merely a receipt and payment of money and does not involve performance of any
service element
·
The
definition of service specifically excludes transactions in money and actionable
claims. There is no dispute regarding the fact that a transaction in money is
not a service in itself as something which is not a service cannot be excluded
from the definition of ‘service’
·
Therefore,
the exclusionary part in the definition of ‘service’ is present for the purpose
of excluding the activities performed for facilitating the transactions in
money. Any other interpretation would make the exclusion
redundant
Judgment
of the HC:
·
The HC
discussed the definition of ‘service’ and the scope of the exclusions to the
definition of ‘service’. As regards the latter, the following two possible
interpretations were found to be possible:
-
The
scope of exclusions is restricted to the activities specified therein. The
purpose of specific exclusions is to make it abundantly clear that the specified
activities are excluded from the definition of ‘service’ (and consequently,
potential service tax);
-
The
scope of exclusions is intended to cover the activities in relation to
the specified activities as the specified activities per se do not
qualify as ‘service’ in the first place. If only the activities specified in
the exclusions per se are considered to be excluded from the definition
of ‘service’ (and consequently, potential service tax), the specific exclusions
would be rendered redundant
The HC
adopted the second interpretation and was of the view that the scope of the
exclusion ‘transactions in money and actionable claim’ from the
definition of ‘service’ cannot be restricted to the said activity per se
but it also covers the activities in relation to ‘transactions in money
and actionable claim’.
·
It was
observed that the purpose of a specific exclusion of ‘transactions in
money’ would be rendered redundant if it is restricted only to ‘transactions
in money’ and not include the activities relating thereto. Since ‘transactions
in money’ per se do not qualify as ‘service’ in the first place, what is
specifically excluded are the services in connection with the ‘transactions in
money’
·
The HC
analyzed the scope of the exclusion ‘transaction in money’ from the
definition of ‘service’ with the aid of Explanation 2 to Section 65B(44) which
specifically provided for keeping out the activities relating to conversion of
currency, usage of money or change in its denomination from ‘transactions in
money’ and thus, making such services potentially liable to service tax.
This Explanation was interpreted to mean that any activity in relation to a
transaction in money is outside the definition of ‘service’ barring the ones
specified in the said Explanation. Therefore, the foreman services under
consideration were held not to be liable to service tax
·
The HC,
after considering the definition of ‘service’ and the scope of the exclusion of
‘transactions in money’ from the definition of ‘service’, held that the
services provided in relation to the chit fund business are not liable to
service tax. Before concluding, the HC also considered paragraph 2.8.2 of the
Education Guide issued by the CBEC which discussed whether transactions under a
chit fund business would qualify under ‘transaction only in money’. The
HC held that the foreman services rendered in connection with a chit fund would
not be taxable which is in direct contradiction to the explanation given in the
said paragraph of the Education Guide – however, the HC refused to express any
opinion on the correctness of the aforesaid paragraph of the Education
Guide.
·
The HC
also quashed Serial No. 8 of the Notification basis the decision taken in the
present case as there cannot be any abatement for a service which is not taxable
in the first place and thus, the very existence of such an abatement was
redundant
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