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Indian Service Tax

Business Auxiliary Service

Effective Date: 1-7-2003.

Authority: NotificationNo.7/2003-ST, dated 20/6/2003.

Rate of Service Tax: 8% upto 9-9-2004 - 10% from 10/9/.2004 - Cess 2% of 10% = 0.2. Total ST = 10.2%.

Definition

"business auxiliary service"means any service in relation to -

Promotion or marketing 9r sale of goods produced or provided by or belonging to the client or
Promotion or marketing of service provided by the client or
Any customer care service provided on behalf of the client or
Procurement of goods or services, which are inputs for the client or
Production of goods on behalf of the client or
Provision of service on behalf of the client or
A service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision.

and includes services as a commission agent, but does' not include any information technology service and any activity that amounts to "manufacture" within the meaning of clause (f) of Section 2 of the Central Excise Act,1944(1 of 1944).

Explanation

For the removal of doubts, it is hereby declared that for the purposes of this clause, "information technology service" means any service in relation to designing, developing or maintaining of computer software, or computerised data processing or system networking, or any other service primarily in relation to operation of computer systems; [Section 65(19)].

Taxable Service: Any service to a client in relation'1o business auxiliary services

Value of Taxable Service: Gross amount charged by the service provider for such service

Exemptions

See Chapter on "General Exemptions"
Specific exemptions
(i) Call Centres
(ii) Medical Transcription Centres
(iii) IT Services
(iv) Computer Enabled Services
(v) C & F Agents
(vi) Insurance Agents

Person liable to pay: Commercial concern providing business auxiliary services.

Head of A/c.: Tax Collection - 00440225, Other Receipts - 00440226, Deduct Refunds - 00440227.

Questions & Answers

Q. Whether services provided by call centres are taxable?

Ans. Business auxiliary services provided by call centres, i.e. Commercial Centres which provide assistance, help or informations, through telephone, on behalf of another person are exempted from Service Tax.

Q. Whether services provided by medical transcriptions centres are taxable?

Ans. Business auxiliary services provided by medical transcription centres i.e. commercial concerns which transcribes medical history, treatment, medical observations and the like, are exempted from payment of Service Tax.

Q. Whether the services provided by a Commission Agent are taxable?

Ans. A Commission Agent is a person who causes sale or purchase of goods on behalf of another person for a consideration which is based on quantum of such sale or purchase. Business auxiliary services provided by a Commission Agent are exempted from payment of Service Tax.

Q. Whether cost of material is also included in the value of taxable service?

Ans. The cost of goods and materials sold by the service provider to the recipient is excluded from the value of taxable service. This exemption would be available only in cases where the sale of such goods is evidenced and the sale value is quantified and shown separately in the invoice.

[Source: Directorate of Publicity and Public Relations, Customs & Central Excise, New Delhi, October, 2003].

Changes from 10-9-2004

F.No. B2/8/2004-TRU, Date: 10-9-2004

18. Expansion of Business auxiliary service:

18.1 The scope of an existing taxable service (i.e. Business Auxiliary Service) has been expanded to include activities relating to procurement of inputs, production of goods (not amounting to manufacture) or provision of services on behalf of a client. The tax is leviable only when the service provider is a commercial concern.

18.2 The pre-budget definition of Business Auxiliary Service covered services, which relate to the sale and marketing side of a business. However, the auxiliary services which relate to procurements, inventory, production (or provision in case of services) were not covered. The present definition intends to bring all business auxiliary services relating to procurement, inventory and production under service tax. Thus, the procurements of input, capital goods or input services as defined in the CENVAT Credit Rules, by a commercial concern for a client i.e. a person producing goods or providing services would be now taxable under this category. Similarly, if a commercial concern produces goods on behalf of the client or provides service on behalf of a client, such activities would come under the scope of this service, unless the activity of service provider amount to manufacture in terms of the central excise law. The aim of all such activities is production of goods or provision of services, the whole or part of which is being carried out by the service provider (i.e. the agent) on behalf of the client. Such activities include procurements, productions or service providing activities done for the client.

18.3 The service tax is, however, being restricted to only those cases where the service provider is a factory governed by the Factories Act, 1948, a company established by or under the Companies Act, 1956 or a corporation or a body corporate established by or under any law, partnership firms (whether or not registered), societies registered under Societies Registration Act, 1860 or under any law and any co-operative society established by or under any law. However, services in relation to agriculture, printing, textile processing and education would remain exempt even if provided by such service providers. (Refer Notification No. 14/2004-S.T., dated 10.9.2004).

23.5 Notification No. 8/2003-S.T., exempts services provided by call centres. For this notification, call centres mean a commercial concern which provides assistance, help or information, through telephone on behalf of another person. The definition of call centres has been modified as 'a commercial concern which provides assistance, help or information or contacts current or prospective customers for sales, telemarketing, payments through telephone, lease lines, satellite links, mail fax, web chat and using information systems for monitoring and recording information on behalf of another person'. (Refer to Notification No. 12/2004-ST, dated 10.9.2004).

Main text of Department Circular/Trade Notice

[Para 2.1 of Circular No. 59/8/2003, dated 20-6-2003]

2.1 Bussiness Auxiliary Service

2.1.1 Call centers and medical transcription centers: Business auxiliary services provided by call centers (i.e. commercial concern which provides assistance, help or information, through telephone, on behalf of another person) and medical transcription centers (i.e. commercial concern which transcribes medical history, "eatn1ent, medical observations and the like) have been fully exempted from levy of service tax w.e.f. 1st July, 2003, vide notification No. 8/2003-Service Tax, dated 20th June, 2003.

2.1.2 Commission Agent

As per the definition of business auxiliary services, services as commission agent ate considered business auxiliary services. However services of commission agent have been exempted from service"", w.e.f. 1st July, 2003 vide notification No.13/2003-Service Tax dated 20th June 2003. Commission agent has been defined in the notification, as a person who causes sale or purchase of goods, on behalf of another person for a consideration, which is based on the quantum of such sale or purchase. It may be noticed that the exemption under this notification is for a commission agent while the services of a consignment agent remain taxable under the category of Clearing and Forwarding services. It may be appreciated that the nature of service provided by a Consignment agent is different \ban that provided by a commission agent. A consignment agent's job is to receive the goods from the principal and dispatch them on the directions of the principal, whereas a commission agent's job is to cause sale/purchase on behalf of another person. Thus, the essential difference is that a commission agent sells or purchases on behalf of the principal while consignment agent receives and dispatches the goods on behalf of a principal. It is possible that a person may be a consignment agent as well as a commission agent. Such a person would already be covered in the category of Clearing and Forwarding agent and would be liable to pay service tax in that category. In other words, the present exemption is available only to such commission agent who is not a consignment agent.

2.1.3 Certain doubts have been raised in case of business auxiliary services.

In this regard the following is clarified -

While it is not possible to give an exhaustive list of business auxiliary services, the following are illustrations of services that are covered under this category viz. evaluation of prospective customers, processing of purchase orders, customer management, information and tracking of delivery schedules, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, managing distribution & logistics. The services provided in relation to getting a customer, verification of prospective customer, processing of purchase order etc would also be covered under service tax, as the law specifically provides for inclusion of such services as business auxiliary support services.
As regards the question whether insurance agents, C&F agents working on commission basis fall under the definition of business auxiliary service, it is clarified that they do not, as they are specifically covered within the definition of other specified taxable services, namely the Insurance service and C&F Service respectively. Under Section 65A of Finance Act1994,it has also been provided that in case of overlap, a service would be classified under the head, (a) which provides most specific description, (b) in case of a composite service having combination of different taxable services, the service which gives them their essential character and (c) in case the test of (a) and (b) does not resolve, the service which comes earlier in the clauses of Section 65, i.e. the service that was subjected to service tax earlier. Since Insurance services and C&F Services are more specific description and were also subjected to service tax prior to imposition of tax on business auxiliary service, the insurance agents, C&F agents working on commission basis would fall under those respective categories. From this, it follows that a particular service can be taxed only under one head of service.
As per the definition of business auxiliary services, information technology service is outside the purview of business auxiliary service. In the explanation appended to the definition in the Act itself, it has been clarified that information technology service means any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. In this regard, it is clarified that only if the output service provided by a service provider is in the nature of the above operations, such exclusion would operate. The mere fact that a personal computer or a laptop has been used for providing the service does not,ipso facto,make the service an information technology service. Similarly, the fact that any of the IT services mentioned in the explanation has been used by the service provider as an input service does not automatically make the output service an IT service. Therefore, in such cases, individual service has to be examined with reference to the explanation provided to the definition of business auxiliary service and only such output services which qualify to be IT services in terms of the said explanation shall remain excluded from taxable service under the heading business auxiliary service.

[Para No.2 of Cir.No. 62/11/2003-ST, dt. 21/8/2003]

2. Scope of IT service under Business Auxiliary Service:

2.1 The definition of Business Auxiliary Service in the law excludes the Information Technology (IT) services. As per the definition IT service means any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. It was clarified in Circular No. 59/8/2003, dated 20th June 2003 that only if the output service provided by a service provider is in the nature of the above operations, such exclusion would operate. The mere fact that a personal computer or a laptop has been used for providing the service does not,ipso facto,make the service an information technology service. Similarly, the fact that any of the IT services has been used by the service provider as an input service does not automatically make the output service an IT. service.

2.2 A doubt has been raised that the clarification in the said circular dated 20-6-03, is at odds with the letter F.No.334/1/2003-TRU dated 28-2-2003 which states, "However computer enabled services, namely, data processing, networking, back office processing, computer facility management shall not be subjected to Service Tax." It is claimed that back office processing may include accounts outsourcing or payroll-processing activities etc. and such service may not be primarily in relation to computer system.

2.3 It is clarified that there is no contradiction between the clarifications dt.28-2-03 and dt.20-6-2003. The scope of IT services is explained in the definition of Business Auxiliary Service in the Act itself as any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. The last words "primarily in relation to operation of computer systems" make the intention abundantly clear. The words "back office processing" used in the clarification dated 28-2-2003 have to be read in conjunction with the other terms used therein viz. data processing, networking, computer facility management. Thus any service of back office processing primarily in relation to operation of computer system will be covered as IT services and not taxable. Payroll-processing, accounts management etc. even by using computer programs, can not be termed as activities primarily in relation to computer systems. The use of computer in these services is secondary and the primary activity is that of business-related work. Thus these services will be taxable as Business Auxiliary Services. This is exactly the position that has been clarified in the circular dated 20-6-2003.

Mutual Funds

Cir. No. 66/15/2003-STDate: 5/11/2003

Sub:- Applicability of service tax on commission income earned on distribution and marketing of units of mutual fund.

I am directed to say that some doubts have been raised regarding application of service tax on the activity of Mutual Fund Distribution as to whether

(1) the commission received by distributors on mutual fund distribution as liable to Service Tax under the category of Business Auxiliary

(2) the services provided is exempt from service tax in terms of Notification No. 13/2003 dated 20.6.2003?

In this connection, it is clarified that the services provided as referred above are primarily in nature of the services of commission agent in relation to clauses (ii) and (iv) of the category of services mentioned in the definition of Business Auxiliary Services and hence should be leviable to service tax under this category. This activity does not get covered under exemption Notification No. 13/2003-ST, dt 20.6.2003 as this is not in relation to sale or purchase of goods. The exemption provided under Notification 13/2003-ST is applicable only for commission agents dealing in goods.