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By CA Madhukar N Hiregange

&  Srikantha Rao T


This year’s budget has introduced quite a few changes in service tax. Though there are hardly any significant changes in terms of procedures and administration, the changes by way of introduction of some new categories of taxable services as well as amendment of existing categories of taxable services have been note worthy. What is striking about the amendments this year is the speed with which the Government has moved in with certain clarifications with regard to renting of immovable property service and commercial training or coaching service which have been issued with retrospective effect. We look at the main amendments as under:  


Renting of immovable property service

This is one category of taxable service which has probably been debated the most in service tax due to its impact on trade and industry. The main controversy had started last year when the Delhi High Court in Home Solution Retail India Ltd Vs UOI (2009 (14) STR 433 (Del)) had allowed a writ petition challenging the levy of service tax on renting of immovable property service. While expressing its views, one of the judgements relied on by the Court was that of All India Federation of Tax Practitioners Vs UOI (2007 (07) STR 625 (SC)) where the Supreme Court had held service tax to be a value added tax on the consumer and leviable on value addition through rendition of services.  The Court had held the view that renting by itself cannot be construed to be a service. There were similar other petitions allowed by other High Courts and following this, tenants across India sought to stop reimbursing the service tax amounts on rentals collected by landlords. 


This led to landlords having clashes with the department which sought to recover service tax by coercive action. A TRU letter F.No. 336/10/2009 ST dated July 15th 2009 was also issued in this regard instructing field level officers to take up steps to protect the interest of revenue. This led to another writ petition being placed before the Delhi High Court in SSIPL retail India & Ors Vs UOI & Ors (2010-TIOL-84-HC-Del-ST) where the petition was disposed off as the respondent (i.e. department) assured corrective action by issuing fresh set of instructions to officers not to take coercive steps.


This has now resulted in the Government coming out with an amendment in Section 65(105)(zzzz) of Chapter V of Finance Act 1994 as amended from time to time with retrospective effect from 01.06.07. The amendment has the effect of regarding renting of immovable property itself as a taxable service. The intention here seems to be to close the issue in favour of the department once and for all and require landlords to collect service tax from tenants where letting out is for furtherance or use in the course of business or commerce, and remit the same to the government. But whether or not this is going to be the last word on the issue is worth discussing.


Assessees have one defence which could be used by them where the department seeks to collect service tax for the prior period and that is the limitation period of one year. Moving forward, assessees would have to take a decision once more as to whether or not to pay service tax. Where litigation is to be avoided, they would have little choice but to pay. But where the assessee is open to the idea of litigating, there are a couple of options open. One argument could be the absence of value addition the importance of which has been laid down by the Supreme Court as indicated earlier. This is something which can be tried even now. The second one is pertaining to the amendment itself and this would impact payments only for the past period. Whether a retrospective effect is possible at all here is something to be seen.


In order to answer this question we would have to see whether the amendment is clarificatory in nature or can be seen as a substantive one. This is critical as a substantive amendment cannot have retrospective effect as held by the Supreme Court in Martin Lottery Agencies Ltd Vs UOI (2009 (14) STR 593 (SC)). The amendment in the said definition has the effect of regarding renting itself as a service in addition to taxing any other service in relating to renting as opposed to the idea of taxing services provided in relation to renting. In this context, the amendment would have the effect of widening the tax base and can be regarded to be substantive in nature. One stumbling block though could be the budget speech of the then Finance Minister Mr. P Chidambaram in 2007 where he had announced the intention to levy service tax on renting of immovable property for use in commerce or business. If this were the case, the present amendment would be in line with that thought process.


This may be one of the reasons why the Government has also introduced a provision for validation of action taken for recovery of service tax under this clause.


Commercial training or coaching

This is another category to see a retrospective amendment with effect from 01.07.2003 i.e. the date on which this category of taxable service had been introduced for the first time. An explanation has been added in Section 65(105)(zzc) holding that any centre or institute by what ever name called imparting training or coaching for consideration would be regarded as a commercial training or coaching centre whether or not the activity is carried on with or without profit motive. This is one amendment which would also impact the liability on account of renting of immovable property to such centres if we were to accept liability on renting of immovable property. 


This amendment seems to be a direct fall out of the various decisions given by the Tribunal in favour of assessee where training or coaching imparted by a not for profit organization had been held not to be liable to service tax as the not for profit organizations could not be regarded as commercial training or coaching centres. One of the yardsticks considered here had been the recognition given under the Income Tax act 1961 as well as restrictions on distributions of surpluses to the stake holders. The present amendment is to overcome the effect of Tribunal rulings so much so that a retrospective amendment is sought to be made in terms of a taxable service category which had not even been introduced by the present Government!!!


One aspect which needs to be reviewed here is the clarification given at the time of introducing this service category to tax vide circular 59/8/2003 ST dated 20.06.03 which clearly spoke of taxing the commercial training and coaching services provided by institutes that prepare applicants for Board examinations and competitive exams. A reading of this circular reveals that there was never any explicit intention to tax training or coaching imparted by not for profit organizations. When that is the case, the present amendment can be seen as something which seeks to expand the scope of levy under this category to tax training imparted by not for profit organizations rather than clarifying the provisions of law already in existence. If that is the case, this amendment cannot be made to have a retrospective effect.


The concept of vocational training institute is also being made stringent prospectively to require such institutes to provide training in designated trades as per Apprentice Act 1961 as well as to require such institutes to be affiliated to National Council for vocational training. Therefore all training institutes providing commercial training or coaching and not meeting this criterion, would henceforth be liable to discharge service tax liability.


Construction of complex service and commercial or industrial construction

An amendment has been introduced under the categories of commercial or industrial construction service and construction of complex service which seeks to bring in the concept of deemed service in a scenario where the customer makes payment (either in part or full amount) before receipt of a completion certificate from a competent authority on completion of the construction process. This amendment seems to be a step backward as the builder may require advance payments towards a contract of sale, a concept which seems to have been ignored here. This amendment would also enable the departmental officers to overlook the contents of the written agreement between the buyer and seller of flats/building including the substance of such agreement as long as some amount has been received before completion of the construction work.  


Luckily, in case of construction of complex service, the concept of “personal use” i.e. apartments meant for personal use of the buyer has been left untouched and it should be possible for the customers/ ultimate users getting flats constructed, to procure flats without payment of service tax. There is a possibility of litigation here especially where the department seeks to hold circular 108/2/2009 ST dated 29.01.09 (which reiterated the benefit of “personal use” as being available,) as being redundant in light of the amendment in this budget.  

Another defence for the assessee could be the fact that the amendment is only with regard to the categories of commercial or industrial construction and construction of complex service and not for works contract. Thus works contractors would be within their rights to raise this issue in case department approaches them with the amendments.


Export of taxable service

There has been a significant amendment in the Export of service Rules 2005 in the sense that one of the criterion for having regarded the taxable service as being exported has been dropped. The clause dropped is the one pertaining to the requirement for the service to be provided from India and used outside India. This is a big relief to the exporters of taxable services as the concept of usage of service outside India had been construed in various ways by the Tribunal and Courts. While in Microsoft Corporation India (P) Ltd Vs CST (2009 (15) STR 680 (Tri-Del)), the business auxiliary service in the nature of marketing support for the client’s products, was held not to be exported out of India as the products were consumed in India, the decision was to the contrary in Blue Star Ltd Vs CCE Bangalore (2008 (11) STR 23 (Tri-Bang)).


Recently in IBM India (P) Ltd Vs CCE Bangalore (2010-TIOL-154-CESTAT-Bang), the decision was contrary to the one in Microsoft Corporation‘s case. This confusion should be sorted out now that the clause on usage outside India has been dispensed with. This can however lead to other issues where billing is done from India from services provided from abroad by group companies where such group companies bill their costs to the Indian entity.


The categories of Chartered Accountant’s services, cost accountant’s services and company secretary’s services have also been subject to a change. As a consequence of this change, taxable service would be regarded as having been exported out of India as long as the service receiver/client is outside India and place of performance of the service would not be a relevant factor.


Health services

A new category of taxable service is sought to be introduced to tax certain health services. Section 65(105)(zzzzo) would cover services in relation to health check up or preventive care undertaken by a hospital, nursing home or multi speciality clinic for an employee of a business entity where the payment for the service is made by the business entity directly to the hospital, nursing home or multi speciality clinic. Even similar services under a health insurance scheme where the payment would be made by the insurer, would be covered under service tax net.


What is liable here is health check up or preventive care and not regular treatment to cure diseases. There could be some issues in case of composite service where a routine check up leads to diagnosis of an ailment which is followed by commencement of regular treatment. The author’s view here is that a composite service for curing an ailment cannot be vivisected to tax the amount that could have been charged for health check up. Services provided in relation to medical records of employees would also be taxed.


Brand promotion

The services of brand promotion is also sought to be subject to service tax under Section 65(105)(zzzzq). This would bring under service tax net, the services provided by brand ambassadors who might appear in advertisements, appear for promotional events or carry out promotional activity for such goods, services or event. Brand here includes a trade name, logo or house mark of a business entity. The gross amount charged for the service either by the brand ambassador or his/her agent would normally be liable to service tax.



A new category of taxable service is being introduced to tax the activity of temporary transfer or permitting the use of enjoyment of copyright other than the ones on original literary, dramatic, musical and artistic work. This is intended to cover copyrights on sound recording and on cinematographic films as per TRU letter D.O.F.No.334/1/2010 ST dated 26.02.2010. Readers may note that copyrights are also regarded as goods and find a mention in the Schedules to the VAT laws of the states. Therefore, permanent transfer of such rights can be seen a transfer of right to use goods which could be liable to VAT under state laws and not service tax.

We have covered some of the more important amendments in this budget. Hopefully after representations some of the impositions would be prospectively applied.


Published by

Madhukar N Hiregange
(Chartered Accountant)
Category Service Tax   Report

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