The term ‘service’ is defined under Section 65(44) of the Finance Act, 1994 (“the Finance Act”) as under:
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 constitute merely-
(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) ....
(iii) ....
Under Section 66B of the Finance Act, service tax shall be levied on the value of all services, other than those service specified in the negative list. Negative list denotes the list of services on which no service tax is payable under Section 66B of the Finance Act, 1994. As per Section 66D (e), trading of goods is a service specified under the negative list. Accordingly, on the activity of trading of goods, no service tax is payable.
If trading of goods is not specified under the negative list then?
Section 66B provides that service tax is leviable on all ‘services’ other than the services specified under the negative list. Therefore, for being exigible to service tax an activity needs to qualify as a service first. The term ‘service’ is defined under Section 65B (44) which specifically excludes an activity of mere transfer of title in goods by way of sale. Thus, the activity of trading which is merely buying and selling of the goods is not a service. Hence, the question of service tax levy on the same does not arise.
Accordingly, even if trading activity is not specified under the negative list of services, it is not liable to service tax, as it is not a service. Further, negative list of services comprises services but an activity of trading of goods is not a service, therefore it cannot be specified under the negative list of services. Therefore, it is worth pondering as to why the activity of trading, which is not a service, is provided under the negative list. The present article aims to highlight real intention behind specifying trading of goods under the negative list of services. To comprehend the actual intention, it is necessary to refer to the treatment given to trading of goods under the old regime of service tax.
Treatment under the old regime
With effect from 1-4-2011, activity of trading of goods was included under the definition of ‘exempted service’ under Rule 2(e) of the Cenvat Credit Rules, 2004 (hereinafter referred as ‘Rules’): Rule 2(e) “exempted service” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes...................
Explanation- For the removal of doubts, it is hereby clarified that “exempted services” includes trading;
This amendment was carried out specifically to overcome the judgment of CESTAT, Ahmedabad in the case of Orion Appliances Ltd., reported at 2010 (9) STR 205, wherein the department had asked the asssessee to do proportionate reversal of credit availed on common input service used for trading activity and for providing taxable service. The Tribunal held that trading activity was covered under sales tax law and cannot be called as a service. Therefore, provision of Rule 6 (3) would not be applicable to an assessee engaged in providing taxable service and trading activity.
Since, trading was not considered as an exempted service, some of the manufacturers and service providers were taking advantage of the same and taking Cenvat credit of service tax paid on input service used in trading activity without any restriction.
Therefore, to overcome this apparent lacuna in the provisions of Cenvat Credit Rules, 2004, the definition of the exempted service was amended and by specifically bringing trading activities within the ambit of exempted service, the provisions of Rule 6 of the Cenvat Credit Rules were made applicable to the manufacturer or service provider undertaking trading activities apart from manufacturing dutiable goods or providing taxable service i.e., a person carrying on manufacturing and trading activity is obligated to reverse the proportionate Cenvat credit availed in respect of trading activity.
The negative list regime
Now, since trading of goods has been specified under the negative list of services, it is a service which is not liable to service tax under Section 66B of the Finance Act. Hence, it would qualify as an exempted service. Consequently, under the provisions of Rule 6 of the Cenvat Credit Rules, 2004, obligation to reverse proportionate Cenvat credit availed in respect of trading activity would arise. Thus, the treatment of trading activity under the old and new regime of service tax is unaffected as far as Cenvat credit is concerned.
However, here it is difficult to understand as to how an activity of trading of goods, which is specifically excluded from the definition of the service, could be included under the negative list of services by considering it as a service. The activity of the trading of goods is excluded from the scope of the service because the Constitution of India authorizes levy of sales tax on sales and purchases of the goods and service tax on the rendition of service. The distinction between the sale and purchase of goods and act of rendition of service is clearly brought out for the purpose of payment of tax.
It is true that the legislature has wide power to create a legal fiction for the purpose of assuming existence of a fact which does not really exist. However deeming trading of goods as exempted service by including the same under the negative list of service does not seem to be in accordance with the principles of the Constitution of India.
Further, recently the Madras High Court in the case, FL Smidth P Ltd. v. Commissioner reported at 2014-TIOL-2186-HC-MAD-CX dealt with the issue, whether entire Cenvat credit of service tax on service used partly for manufacturing and partly for trading was available for the period prior to 1-4-2011. In this case the appellants used service of commission agent commonly for manufactured goods and traded goods and availed full credit of the same. The department disallowed Cenvat credit relating to trading activity. The order was upheld by the Tribunal against which appeal was by the assessee before the Madras High Court. The High Court held that credit to the extent used for manufactured goods would only be available and credit to the extent used for traded goods was not available.
In arriving at the above conclusion, the High Court relied on Rule 2(l) of the Cenvat Credit Rules, 2004 (“Credit Rules”) which defines input service as services which are used by the manufacturer directly or indirectly in relation to the manufacturing of final product and clearance of final product from the place of removal. As this definition did not cover services used in relation to trading of goods, the High Court held that credit of services used in relation to trading was not available.
In this decision, the High Court has rightly decided that the Cenvat credit of input service attributable to trading is not available. However, the issue as to whether partial reversal of Cenvat credit can be demanded on the common input service used for trading and taxable output service and whether value of trading turnover can be taken to be the margin 10% of cost of purchase as is presently taken under Rule 6 of Credit Rules still remain undecided.
Conclusion
Thus, by specifying the activity of trading of goods under the negative list of services, it becomes an ‘exempted service’. However, an activity of trading of goods, which constitutes merely a transfer of title in goods by way of sale, is specifically excluded from the definition of service, thus the question of considering it as exempted service raises more questions. It is a moot point whether the provisions of Rule 6 of the Cenvat Credit Rules, 2004, would be applicable to those cases where input services are commonly used for trading activity and manufacturing of dutiable goods or providing output services and whether proportionate reversal of Cenvat credit would be required.
[The author is a Senior Associate, Lakshmikumaran & Sridharan, Ahmedabad]