MAY 25, 2015

By Vishwanath K, ACA, Grad. CS

THE definition of the term "Service" and the contents of section 66D(Negative list) of the FA, 1994 makes interesting reading.

"Section 65B: (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a) an activity which constitutes merely,--

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii)such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii) ………………….."

A closer look at the definition clearly leads one to the conclusion that if the activity is merely a transfer of title in goods by way of sale, the same does not amounts to "Service" under the said Act.

From a layman perspective, in case a person engaged in the activity of purchasing and / or selling goods i.e. trading of goods, the above definition means he is out from its ambit. In other words, he is not providing any "service". Therefore, the liability of pay service tax does not arise.

However, when we read Section 66E of the said Act, it provides a different understanding:

"66D. Negative list of services: - The negative list shall comprise of the following services, namely:-- (e) trading of goods"

The above said provision states that one of the items in the negative list of services is trading of goods. In other words, the negative list of services includes a service which is "Trading of goods".

Here, the layman would be in confused state of mind because on the one hand, that too, in the definition section, the law provides that service does not include an activity which is transfer of title in goods i.e. trading of goods.

In the negative list of services, the law is indirectly (via back door entry) including the activity of trading of goods as a Negative service. Therefore, the million-dollar question that arises is whether "trading of goods" is a service or not post introduction of negative list for the limited purposes of the Finance Act, 1994.

It would be relevant here to reminisce the decision of Tribunal in the case of Orion Appliances Ltd - 2010-TIOL-752-CESTAT-AHM wherein the Hon'ble Member of the Tribunal has held as follows:

"5. As regards the issue as to whether trading activity can be called a service, it is quite clear that since trading activity is nothing but purchase and sales and is covered under sales tax law, it may not be appropriate to call it a service. Therefore it has to be held that trading activity cannot be called a service and therefore it cannot be considered as an exempted service also."

The above decision has been followed and relied/referred in other cases and one such case is that of Mercedes Benz India Pvt. Ltd - 2014-TIOL-476-CESTAT-MUM wherein the Hon'ble Tribunal has held that "…. trading was not a service and therefore, cannot be considered as an exempted service during the period prior to 1-4-2011."

Though the above decision was rendered in the pre-negative list era (in the context of reversal of CENVAT Credit), the principle remains that the activity of purchase and / or sale of goods cannot be called as "Service" and the same is a covered by List II i.e. State List under VII Schedule of Constitution of India.

If the reason for inclusion of trading of goods was limited only for the purpose of ensuring the reversal of CENVAT Credit attributable to trading of goods, then the provisions of CCR, 2004 ought to have been amended to such an extent to contemplate and include such situation coupled with proper backing provisions in the Finance Act, 1994. Merely for the purpose of restricting the CENVAT Credit the provisions of the Finance Act, 1994 should not have been jumbled-up to create an anomaly or overlapping situation which is difficult to comprehend for both, the layman and lawman.

Or whether such inclusion in negative list is as a matter of ex abundant cautela??

Before parting…

The trader of goods would be indifferent in so far as the levy of service tax is concerned. If it is treated as "Service", the trading is covered under exclusion clause and out from the levy and if it is treated as negative list of service, it would still be out from the levy. In any case, trading of goods falls in List II item of Schedule VII and Union has no power to tax it. However, the reversal of CENVAT credit attributable to trading activity would still be haunting problem.

Let's hope the Courts & Tribunal resolve this vexed question in the times to come. Till then the erstwhile saga may gleefully continue.

(The author is associated with Lakshmikumaran and Sridharan & the views expressed are strictly personal.)