Bombay Chartered Accountants Society

Case Study-Service Tax

1

S. Thirumalai

June 19, 2015

Place of Provision of Service Rules,

2012

Case 1: Pharma Industry (R&D activities)

Neem India Pharmaceutical proposes to start the following activities at their R & D Unit :

• Formulation Development;

• Method Development, method validation and method transfer; and

• Stability analysis

• In formulation development Active ingredient is identified and supplied by OVERSEAS SERVICE

RECIPIENT and the scope of development involves the process of combining a suitable excipient

with the identified API to obtain a formulation with the desired characteristics and quality.

OVERSEAS SERVICE RECIPIENT provides information on the dosage form, patient age, dosage

and timelines for the particular formulation which is to be developed. The local development team

identifies the possible excipients and other compounds required for the formulation development

and place an order. The API and excipient will normally be provided by OVERSEAS SERVICE

RECIPIENT and some compounds will be sourced locally or from overseas from third party

vendors. The output is sent in the form of a formulation development report. This is a technical

document on the process/ formula of developing the formulation. This does not involve any clinical

or commercial manufacturing from Indian site. The material received are either analyzed,

converted to formulation or destroyed without further distribution.

• Method development refers to the analytical procedures of developing standard methods for

testing critical parameters of drug products (formulations) or drug substances (APIs). The

parameters refer to characteristics such as moisture, assay, degradation compounds, dissolution,

level of trace materials etc. The objective of method development is to create standard testing

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Case 1: Pharma Industry (R&D activities) (cont..)

procedures for each of the parameter. OVERSEAS SERVICE RECIPIENT will determine the

analytical parameters for which method is to be developed and validated. Batches of sample

materials and compounds are received and then analyzed by the specialist team. This leads to

developing standard methods and their validation that can be employed for testing the product

parameters and defining the acceptance ranges for the product parameters. The output is a

method development and validation study which documents the technique and steps for the testing

methods that are developed and the acceptance criteria. This is sent electronically to the service

recipient.

• Stability study refers to testing various parameters of drug substances and drug products for

determining the shelf life of the product under various conditions such as humidity, temperature,

light, etc. Preparation of stability assessment protocol is led by analytical project leader at

OVERSEAS SERVICE RECIPIENT along with analytical expert locally. The product parameters

that are to be tested (as mentioned above), as per validated methods. Some of the methods for

testing are provided by OVERSEAS SERVICE RECIPIENT. The test results are collated for

samples drawn at different times over several months. Intermediate reports and final reports are

prepared and sent to OVERSEAS SERVICE RECIPIENT.

The issue is whether service tax is applicable on the proposed services to the overseas

recipient by Neem India in terms of Place of Provision of Services Rules, 2012 read with Service

Tax Rules, 1994.

4

Case 1: Pharma Industry (R&D activities) (cont..)

For an activity to be subject to service tax in terms of the Finance Act, 1994, the following will have to

be fulfilled:

• The activity must be “Service” (Section 65 B (44) of the Act) or specifically mentioned as a “Declared

Service” (Section 66E of the Act).

• The activity shall not be covered under the Negative list (Section 66D of the Act) or exempted

(exemption notifications).

• Place of provision of service as per the Place of Provision of Services Rules, 2012 (POPS Rules)

should be in the taxable territory ( “taxable territory” basically refers to “India” (Sec 65B(52))

Rule 14 of POPS Rules - The Rule that occurs later in order under the POPS Rules shall be given

preference, as against any other rule which may appear equally relevant.

Rule 3 of the POPS Rules(General rule) – place of provision of service is the place of the service

recipient.

Rule 4 of the POPS Rules –

• Goods are actually made available to the service provider.

• The provisioning of the service is not possible without the physical presence of goods.

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Case 1: Pharma Industry (R&D activities) (cont..)

Conclusion:

• It is imperative to analyze in each of the activities, whether the goods/ samples made physically

available to Neem India by the foreign service recipient would alter the tax position.

• Formulation Development: This is essentially a skill based activity because the presence of

material supplied by the service recipient is only incidental and the end objective is the most

efficient and productive method for development of the drug product . Therefore this could be

argued to fall under Rule 3 and be exempt from service tax. Subject to conditions will qualify as

export

• Methods Development: Again the focus here is on the various methods to develop standards for

testing the drug products or drug substances and the presence of material supplied by the service

recipient is incidental and not essential to carry ouf the scope of work. Hence this also could fall

under Rule 3 and get excluded from tax. Subject to conditions will qualify as export

• Stability:This is actually carried out with respect to given materials such as drug substances or

products and for report back on set pararmeters. There is no skill application beyond what is

provided namely the substances and the testing methods. This is a case where Rule 4 will apply

and the taxable service will be seen as having been provided in India and therefore taxable

6

Case 2: Global agreements

Co. XYZ, located in New York, has a subsidiary Co. PQR in India, which provides IT support services

to XYZ towards fulfillment of XYZ‟s terms with Co. MNO, also in New York, has a global agreement

with XYZ pursuant to which XYZ shall interalia provide IT professionals for the activities of MNO in the

countries covered by the agreement .

MNO has operations in India through its subsidiary, Co. RST, which supports the IT software services

of MNO. PQR is required to provide manpower to RST for work in India under the supervision of RST.

PQR procures manpower from “MPS” and supplies them to RST. PQR receives consideration in

convertible foreign exchange from XYZ which includes consideration towards supply of manpower in

India.

• Examine whether the services will qualify as “export” since PQR receives consideration, including

consideration towards the supply of manpower, from XYZ in convertible foreign exchange?

• Is the supply of manpower by PQR to XYZ naturally bundled?

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Case 2: Global agreements (cont..)

Discussion:

PQR renders IT support services to its foreign parent Co. XYZ. Co. XYZ in turns bills Co. MNO in terms

of its global agreement.

Taxability of bundled of Services (Section 66F(3) of the Act) –

• If various elements of such service are naturally bundled in the ordinary course of business, it shall

be treated as provision of single service which gives such bundle its essential character;

• If various elements of such service are not naturally bundled in the ordinary course of business, it

shall be treated as provision of the single service which results in highest liability of service tax.

Transactions –

PQR rendering IT support to Co. XYZ (services ultimately for Co. MNO) billed to Co. XYZ

PQR supplies manpower to RST (Indian company) and bills its parent Co. XYZ –

• Payment in convertible foreign exchange.

• Manpower supply, is rendered as part of the global agreement entered into between Co. XYZ

and Co. MNO.

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Case 2: Global agreements (cont..)

Analysis & Conclusion:

For the IT support services rendered to Co. XYZ –

• Would be Export of Service (Rule 3 of the POPS Rules)

For the Manpower Supply services rendered to RST -

• Ultimate recipient of service is RST

• No specific agreement entered into between PQR and RST and the said services are rendered only

as per the global agreement between Co. XYZ and Co. MNO.

• Services are billed to Co. XYZ; XYZ to include additional services and ultimately bill the same to

Co. MNO.

• Actual recipient of the aforesaid manpower supply services is Co. XYZ.

• Should qualify as Export of Service (Rule 3 of the POPS Rules).

9

Case 3: Repair Services

XYZ Ltd, an Indian company sends a corrupted hard disk to ABC Inc., Singapore for recovery of

data/information. ABC Inc. on receipt of the corrupted disk recovers the information saves the data

in a new hard disk and sends the new disk to XY Ltd. Consideration is charged for recovery of data

and new hard disk.

Determine whether the above services would fall under the purview of –

• Rule 4, performance based – as the disk was physically made available to the service

provider; Or

• Rule 3, default rule – as the intention is to obtain the recovered data and not the repair of

corrupted hard disk.

Case 3: Repair Services (cont..)

Analysis & Conclusion:

The essential characteristic of a service to be covered under Rule 4 of the POPS Rules –

• Goods temporarily come into the physical possession or control of the service provider,

• Without the physical possession of goods, the service cannot be rendered.

Example of services are repair, reconditioning, or any other work on goods (not amounting to

manufacture), storage and warehousing, courier service, cargo handling service (loading, unloading,

packing or unpacking of cargo), technical testing/inspection/certification/ analysis of goods, dry

cleaning, etc. (Para 5.4.1. of the Educational guide)

• All such services which entail transfer of physical possession of the goods from the service

recipient to service provider in order to facilitate the provisioning of the taxable service would be

categorized under Rule 4 of the POPS Rules.

• Without the handover of the physical possession of the hard disk, the data recovery is not

possible.

• Service is not taxable in India (rendered in Singapore – Rule 4 of POPS)

• The intention is to obtain the data and not the repair of corrupted hard disk. This would not

affect the transaction from obtaining the benefit of fact that the service is rendered outside

India.

Point of Taxation Rules,

2011

Case 1: Agency Services

Comagency India Ltd desires to know the point of taxation in case of Indenting commission paid/

received where invoice has been raised prior to 01 October 2014, and payment is received/ made after

01 October 2014.

This question arises in the context of the Notification 14/2014 –ST dated 11 July 2014 (Effective from

1st October 2014), and involves the scope of the expression „intermediary‟ which shall also include a

person who arranges or facilitates supply of goods between two or more persons (i.e.an indenting

agent). In view of this, Comagency would invite comments with respect to two scenarios, whereby

Comagency acts as a service provider and also where, Comagency is a service receiver.

Comagency India Limited as a service provider –

Analysis & Discussion -

• Comagency India acts as an agent for transactions in sale of products between Comagency

Singapore and respective customers in India of Comagency Singapore.

• Point of Taxation Rules, 2011 („POTR‟) prescribe the point of time when a service shall be deemed

to have been provided and hence, the point of time when service tax on the same is required to be

paid.

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Case 1: Agency Services (cont..)

• Rule 3 of POTR states that unless otherwise provided in any other rules, „point of taxation‟ shall be

determined as per Rule 3. Accordingly, in the present case it is essential to analyze whether

Comagency India gets covered under other rules prescribed in POTR to determine the point of

taxation with respect to intermediary services.

• Rule 4 of POTR deals with the determination of point of taxation in case of change in effective rate

of tax. The "change in effective rate of tax" has been defined in clause (ba) of rule 2 of POTR to

include a change in the portion of value on which tax is payable.

• Rule 5 of POTR deals with the payment of tax in case of new services. Rule 5 of POTR states that,

where a service is taxed for the first time, then no tax shall be payable in the following cases:

• Invoice has been issued and the payment received against such invoice before such service became taxable;

• Payment has been received before the service becomes taxable and invoice has been issued within fourteen

days of the date when the service is taxed for the first time.

The question to be decided is whether the change in taxability that arises on account of change in

Place of Provision of Service Rules, 2012 by virtue of Notfn No 14/2014-S.T (ibid) would constitute a

change in ”effective rate of tax” within the meaning of the expression as defined. The taxability arises

on account of change in place of provision of service owing to a change in definition of “intermediary”

and therefore could it be said that there is no change in effective rate of tax. The CBEC has issued a

circular No. 162/13/2012 - ST, dated July 6, 2012 giving certain illustrations to decide when there is a

change in effective rate of tax.

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Case 1: Agency Services (cont..)

In the facts of the present case can it be said that the intermediary service shall qualify as “new

service”.

• The place of provision of the agency services (with respect to supply of goods) has been amended

i.e. in terms of Rule 9 of the POPS Rules i.e. with effect from October 1, 2014 the said services

would be deemed to have been rendered within the taxable territory of India even in cases where

they are for the benefit of service recipients located outside India.

However, in the present case, the invoice for the said service has been raised prior to October 1, 2014

therefore the point of taxation of the said service would be determined in terms of Rule 3 of the POT

Rules i.e. point of taxation is before October 1, 2014.

Therefore, the POT in the present case being prior to October 1, 2014 the same is not taxable in India

in terms of Rule 9 of the POPS Rules but would be deemed as export of service in terms of Rule 3 of

the POPS Rules.

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Case 1: Agency Services (cont..)

Comagency as a recipient of service:

With effect from 01 October 2014, services are received by Comagency India from Comagency

Pakistan, wherein Pakistan acts as an agent for transactions in products between Comagency India

and respective customers outside India. This shall not qualify as an intermediary service as per Rule 9

of Place of Provision of Service Rules, 2012 since location of service provider is outside India. Hence,

with effect from 1 October 2014, the services provided by Pakistan to India shall not be subject to

service tax. What would be the position with regard to POTR in the second scenario?

The converse would apply in case Comagency India would be the recipient of service. The said service

would be import of taxable services in terms of Rule 3 of the POPS Rules. Therefore, Comagency

India would be liable to pay service tax @ 12.36% on reverse charge basis.

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Case 2: Tax Vs. Accounts

Excellent Data Management Services Ltd (EDMS) is a company registered under the Companies

Act1956 and engaged in provision of services to its clients in Telecommunication, Banking, E-

Governance etc.

Issues under consideration-

• Whether the company is liable to pay service tax on the revenue which is accounted in “Profit &

Loss Account” as “Work-in-progress”. Though services have been provided no invoices for the

same could be issued as clients have not confirmed the quantum of such services and have also

not confirmed quality of such services (Accuracy level, Turnaround time etc.)

• As per the contract entered into with various clients, the company is expected to maintain certain

level of accuracy and Turnaround Time („TAT‟).

• To raise invoice on its customers, the company needs to obtain written confirmation from its clients

on total quantity of “Accepted forms” and accuracy level and TAT achieved.

• As per Generally Accepted Accounting Principles („GAAP‟), revenue and cost should be recognized

on matching principle. As certain operating and administrative expenses are incurred by the

company towards provision of services, in the financial statement the same are accounted as

“Work in progress”.

• “Whether mere accounting of part of the revenue in the Profit & Loss Account could constitute

completion of service so as to attract “Point of Taxation” even through certain incidental activities

(acceptance of services by clients) are yet to be completed”

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Case 2: Tax Vs. Accounts (cont..)

Analysis & Conclusion:

• Rule 3 of the POT Rules - In case of continuous supply of services, where the provision of the

whole or part of the service is determined periodically, the point of taxation would be determined

based on the completion of the event which would trigger the taxability of the said service in

terms of the contract between the parties.

• Banks usually charge the customers on a monthly or fortnightly basis, therefore the said „work in

progress‟ in the books of accounts would not entail levy of service tax till the completion of such

specified period (in the current case end of the month).

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Case 3: Club & Membership services

Avery Club Ltd. (a trade body) providing services to its members has a clause in the Articles of

Association which reads as follows: Every ordinary member shall pay an annual subscription at the

following rates as applicable for each category:

• Associate Member.........

• Affiliate Member....

• Company Member........

• Every member shall be liable to pay in advance the annual subscription on or before the day of

March 31 for the ensuing year.

• Members who pay the subscription after March 31 but before April 30 shall be entitled to vote at

the ensuing Annual General Meeting but not be eligible to contest, propose or second a

candidate for election to the Managing Committee

• If the member continues default in payment of his yearly subscription by the due dates as

aforesaid a reminder shall be sent to such defaulter and if payment is not received within one

month thereafter the Managing Committee shall have the power to remove the name of such

defaulting member from the Register of Members

What should be the POT with regard to the following in the above context and when should the

invoice be issued in each of the cases keeping in view the default cases:

• Advance received for the ensuing year before April 1

• Payments received during April 1 to April 30

• Treatment in respect of defaulting member who does not pay after issue of notice on say May 7

Case 3: Club & Membership services (cont..)

Analysis & Conclusion:

Payments made prior to March 31

• The Point of taxation with respect to advances (received prior to April 1) for services to be

received from April to March in the subsequent year is the date of receipt of consideration (as the

payment is made in advance). The POT is therefore the date of receipt and the tax should be

paid by the 5 th of the following month.

Payments made between April 1 to April 30

• This is a continuous service. The POT would be determined based on Rule 3 of the POT rules,

where the provision of the whole or part of the service is determined periodically, the point of

taxation would be determined based on the completion of the event which would trigger the

taxability of the said service in terms of the contract between the parties.

• In the present case, the point of completion of service is annual.

• Therefore, with respect to the cases where the members make payment between April 1 and

April 30, the POT will be the date of receipt of consideration.

Payments not made:

• Where the members fail to pay the membership fee, the POT would be the date of completion of

service i.e. March 31 of the subsequent year or date of payment (if received) whichever is earlier.

Case 3: Club & Membership services (cont..)

Analysis & Conclusion:

Payments not made:

In this case the member failed to pay the amount by April 30 and an intimation was issued to him on

May 7 to pay within one month. If he fails to pay by May 30 then an invoice should be issued to him

and tax paid on the 5 th of June. If the member fails to pay by the 7th of June then the tax paid could

be adjusted in the return on the removal of the member's name on the ground that the service has

failed. This could be in terms of Rule 6(3) of the Service tax Rules under intimation to the member

by issue of a suitable advice in the form of credit note.

Valuation under Service Tax

Case 1: Pass through costs

• As per the Agreements between ABC and Clients (In India or outside India), ABC engages sub-

contractors in India who will be the investigators to conduct the clinical trials on human participants.

These investigators may be doctors or hospitals whose responsibilities are to conduct the trials in

accordance with the protocol or ABC‟s instructions.

• The services are generally in the nature of support services to the clients for undertaking the clinical

trials of various phases and ABC assist the clients to obtain the necessary approval by conducting

those studies, take up the supervision / co-ordination with the sponsor‟s project team, assist to

prepare the study feasibility questionnaire, provide quality assurance services, data management.

• ABC charges pass through costs such as travel cost, investigators meeting expenses, ,

communication expenses, license cost, investigators grants etc. on actual basis to their clients

incurred during the project time for providing the clinical research services in terms of agreement

entered with Indian and Overseas clients.

• ABC pays service tax on the professional fees received both in respect of overseas and domestic

clients

Issues

Whether the costs incurred/ pass through costs by the ABC in terms of various agreements

entered with Indian and Overseas customers is subject to service tax , as these are pass

through costs incurred towards the provisions of professional services and same is recovered

from time to time during the project in terms of agreements?

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Case 1: Pass through costs (cont..)

Analysis and Discussion:

• Expenses incurred by the service provider can generally be classified as expenses which the service provider incurs:

on his own in providing the taxable services. For example, printing and stationary charges incurred by the management consultant at his office in the course of providing the services

on behalf of the service recipient in the course of providing the taxable service. For example, customs duty, port charges, EDI expenses incurred by Customs House Agent

Whether the aforesaid expenses are to be included so as to arrive at the ‘gross valuecharged’ for the purpose of payment of service tax?

• In terms of Rule 5, all expenditure and costs incurred by the service provider in the course of providing taxable service shall be treated as consideration for the taxable service provided and included in the value for the purpose of charging Service Tax

• Any payment made on behalf for the recipient of service and accordingly recovered separately does not constitute a charge so as to fall within the expression “costs and expenses incurred by the service provider”

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Case 1: Pass through costs (cont..)

Conclusion:

• The Delhi High Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. 1 on

a harmonious reading of the charging provisions i.e. Section 66 and 67 of the Finance Act, held it is

clear that nothing more and nothing less than the consideration paid as quid pro quo for the service

can be brought to charge. It was also held that Service Tax (Determination of Value) Rules, 2006

are repugnant to the provisions of the Finance Act, 1994, as they purport to include expenditure

and costs in the value of taxable service and go far beyond the charging sections and may also

result in double taxation

• Section 67 of the Finance Act with respect to valuation of services has been amended to include all

reimbursable expenditure or cost incurred and charged by the service provider.

• In light of such changes, the said pass-through costs need to be included in the value of

taxable services. Could it be still said that the amendment has not dealt with the issue of

pass through costs ?

251 2012-TIOL-966-HC-DEL-ST

Case 2: Goods supplied free of cost

A mining company engages contractors for over burden removal towards the activity of extraction of

ores from the soil. The contract terms envisage that the contractor should provide all the equipment

required and also the diesel to run such equipment where required. Under the contract terms

explosives and detonators required for the said activity though a restricted item in terms of safety

requirements and certification has to be supplied by the contractor. Alternatively the aforesaid items

such as diesel and explosives/detonators will be supplied by the mining company and is not the

contractor‟s responsibility.

Running bills are submitted at the agreed rates by the contractors based on the productivity and other

parameters as laid down and certified in terms of the contract and at pre fixed rates. As stated above

the pre fixed rates could be either with the cost of diesel and explosives/detonators expressed in terms

unit rate for cubic meter of material removed or excluding such cost of diesel and explosives.

The department has taken a view that the mining company has adopted the device of excluding the

cost of diesel and explosives /detonators to reduce the incidence of service tax on such supplies by

entering into contracts where the rate per cubic meter of material removed does not include cost of

such diesel and explosives/detonators The position taken is that the diesel and explosives/detonators

are essential for the performance of the activity and without this the said over burden removal cannot

be undertaken. The claim of the mining company is that explosives and detonators being controlled

items will have to be necessarily supplied by them and cannot be procured in the open market by the

contractors in the normal course. The liability to service tax will have to be strictly on the terms of the

contract and there is nothing in this to invoke the provision of similar services under the service tax

valuation rules.

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Case 2: Goods supplied free of cost (cont..)

Analysis & Discussion:

• Provision of service for a consideration not wholly or partly in terms of money / consideration not

ascertainable:

‒ For consideration received partly in money, Service Tax is payable on the fair value of non-

monetary consideration, which is equivalent to the money value of such consideration

‒ If the same is not ascertainable, value of such consideration shall be determined as per

Section 67 (iii) read with Rule 3

• The Larger Bench of the Tribunal in Bhayanna Builders1 has defined the scope of the expression

„gross amount charged‟ -

• The issue that had come up for consideration was whether the value of materials supplied free

of cost by the service recipient and used for providing construction service, should be included

in the gross amount charged by the service provider for the purpose of valuation

• The Larger Bench held that for the purposes of Rule 3, non-monetary consideration must be a

consideration accruing to the benefit of the service provider from the recipient and for the

service provided

27 1 2013-TIOL-1331-CESTAT-DEL-LB

Case 2: Goods supplied free of cost (cont..)

Conclusion:

The position based on the Bhaynna principle would be that where it is the responsibility of the

contractor in terms of the agreement to supply the fuel, diesel and denotators and explosives the

same would get included in the value for purpose of service tax. It would be no answer to say that the

mining company supplied the same and hence the deduction from the gross invoice including cost of

such supplies is valid and tax leviable on the net amount

However where the responsibility is that of the mining company then there is no question of adding

the value of the fuel and detonators and explosives to the value of services by way of over burden

removal.

In any case the invocation of the provision of Rule 3 based on similar services is not warranted as

there is no case of avoidance or evasion with intent to do so.

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Case 3: Work Contract Service

Agreement between ABC and a contractor for a works contract involving

• installation/ commissioning service,

• supply of materials, and

• perform annual maintenance services

As part of such installation/ commissioning work, ABC supplies certain materials/ capital assets to

the contractor that are consumed / used in the execution of the work, by the contractor. Post

completion of the contract, the capital assets are returned by the contractor to ABC.

The contract clearly specifies separate consideration for supply of materials, services and

composite works. The price quoted by the contractor in the Letter of Acceptance indicates that the

consideration is exclusive of Service Tax but inclusive of all other taxes including VAT.

The contractor raises invoices for the activities undertaken, in the following manner:

• Bill for services

• Bill for supplies made by the contractor to ABC in relation to the contract

• Composite billing for indivisible activities, involving supply of both materials and services

Case 3: Work Contract Service (cont..)

Points to ponder

• Whether a single contract entered into with the contractor could be bifurcated as a contract for

service, contract for supplies and a composite contract?

• Valuation mechanism for the computation of service tax in the given situation?

• Determination of whether the value of materials (used and consumed in the contract), supplied

by ABC to the contractor, would be includible in the taxable value, for the purpose of

determination of the service tax liability?

• Determination of whether the value of capital assets (used in the contract and returned to ABC

post- use), supplied by ABC to the contractor, would be includible in the taxable value for the

purpose of determination of the service tax liability?

Case 3: Work Contract Service (cont..)

Analysis & Discussion:

• Separate contracts for supply of goods and service cannot be clubbed

Para 64 - Kone Elevator [2013 TIOL 46 SC CT LB] and L&T - [2013 TIOL 46 SC CT LB]

State of Karnataka vs. M/s Transglobal Power Limited [ 2014-VIL-348-KAR]

Reliance Infrastructure vs. Dy. Commissioner, Sale Tax [2015-VIL-50-CAL

• Works contract can be bifurcated into different scope for levying service tax under the

appropriate category

L&T vs. CST [015-VIL-147-CESTAT-DEL-ST-LB]

Gammon India Ltd. vs. CCE [2014-TIOL-1344-CESTAT-MUM]

• Separate contracts for supply of goods and service can be clubbed

Gupta Energy Pvt. Ltd. [2014-VIL-168-CESTAT-MUM-ST

• In case the contract is treated as divisible contract, valuation methods can be applied

independently for each of the scope as under:

Full service tax on erection and commissioning services (1st part)

No service tax on supply of material (2nd part) and

abatement/identification method in case of annual maintenance contract

Case 3: Work Contract Service (cont..)

Analysis & Discussion:

• In case the contract is treated as a single contract without any bifurcation between different scope,

service provider either need to opt for identification method or abatement method.

• In case of abatement method for payment of service tax, the entire contract value including free

supply of goods and services need to be added as part of total amount for the purpose of

application of percentage.

• Further, valuation of free service in the form of usage of capital goods supplied by the contractee

may also be difficult in the absence of any comparable prices available for such usage. One may

consider proportionate depreciation as a basis to arrive at the value for such free services.

Service Tax - Exemptions

XYZ is an aggregator of healthcare services. It enters into arrangements with various

service providers and offers such services to end-users.

Mode of operations

• XYZ will book orders from end-users for diagnostic services, receive payment from

them and in turn get these services performed by various service providers (diagnostic

centres).

• The diagnostic centres render the services to the customers of XYZ and provide the

reports.

• The engagement between XYZ and the diagnostic centres is on a principal to principal

basis.

• XYZ enters into such arrangements with multiple diagnostic centre

Whether XYZ would be eligible to claim exemption from payment of Service Tax

as a provider of health care service in terms of Sl. No.2 to Mega Exemption

Notification No.25/2012-ST dated June 20, 2012 ?

Service Tax Liability on aggregators of health care services

Analysis & Discussion:

• In terms of Notification No. 25/2012-ST dated 20.06.2012 as amended by Notification No.

6/2015-ST dated 01.03.2015, “Health care services by a clinical establishment, an authorized

medical practitioner or para-medics” are exempt from the levy of service tax.

• XYZ is an aggregator for the health care services and not a clinical establishment or authorized

medical practitioner or para-medic per se. The exemption available under the Notification is only

with respect to the health care services provided by the clinical establishment or authorized

medical practitioner or para-medic.

•

Service Tax Liability on aggregators of health care services

36