Interconnection use charge to attract service tax soon

A. In terms of the existing definition of "telephone service" in the Finance Act, 1994, any service provided to a subscriber by the telegraph authority in relation to a telephone connection is chargeable to service tax. The subscriber means a person to whom any service of a telephone connection has been provided by the telegraph authority.

Therefore, a subscriber in respect of telephone service is the person who avails of service of the telephone connection. While providing service of interconnection usage, no service of telephone connection is provided to the recipient telegraph authority. No doubt it is a service in relation to a telephone connection.

However, as long as a service is not provided directly to a subscriber (as mentioned above), the service may not fall in the category of telephone service. Therefore, interconnection usage charges would not be taxable under the head 'telephone service'. The government has also clarified this position vide Circular No. 91/2/2007-ST, dated March 12.

However, it may be noted that vide Finance Bill, 2007, a new definition of "telecommunication service" is proposed to be incorporated in the law, wherein the activity of interconnection usage has been specifically included in the definition of "telecommunication service" to make it a taxable service.

Further, under this category, any service provided or to be provided, to any person, by a telegraph authority in relation to "telecommunication service" has been made taxable. This amendment will come into effect from a date to be notified by the government after the enactment of Finance Bill, 2007. Therefore, after this amendment comes into effect, service tax would be applicable to interconnection usage charges.

Q 2. Our company is in the business of development of social projects for corporates. Our services mainly consist of providing assistance in the development of companies' social and community policy including selection of staff, projects, advice on implementation, advice on the development of communications strategy, and other related tasks. Are our services chargeable to service tax?

A. According to the above description, it appears that the services provided by your company are in the nature of advice for formulating policies and strategies and assistance in implementation thereof. The purpose of above services is to assist your clients to manage their projects.

The relevant taxable category that needs to be examined here is management consultancy services. For the purpose of the aforesaid taxable category, the coverage of the expression "management" is very wide. In this regard, the CBEC Order No. 1/1/2001-ST, dated June 27, 2001, explains that "management" has been generally understood to mean the process of application of management principles, methods and practice for the efficient functioning of different systems of an organisation such as production, personnel, marketing or finance.

The above order further refers to the opinion given by the Indian Institute of Management, Ahmedabad, which states that the term "management" is generally understood to mean running the affairs of an organisation in an organised and systematic manner. To be able to do this efficiently and effectively, management typically involves carrying out of host of activities, functions and tasks and at different levels.

Thus management encompasses both strategic and operational-level functioning and includes tasks such as planning, organising, staffing, directing, controlling and coordinating. Based on the above interpretation of the expression "management", it may be inferred that the expression "any service in relation to management" is wide enough to include every kind of consultancy, advice, etc, relating to all the disciplines of management.

Reflecting upon the nature of services to be provided by your company, it can be seen that the consultancy for development of social and community policy including selection of staff, projects, advice on implementation, and advice on the development of communications strategy is essentially for assisting the clients in managing their projects. Therefore, such services are taxable under the taxable category of management consultancy services.

The Q&A has been prepared by the indirect tax team of PricewaterhouseCoopers led by S Madhavan. Readers are requested to send their queries at taxqueries@business-standard.com