Ownership is not relevant in service tax

EXPERT EYE

So long as a service is provided, irrespective of who holds the materials on the basis of which the service is provided, the service becomes a taxable service. This principle has not been properly appreciated (and in fact the opposite has been written) in a recent circular (No.92/3/2007-Service Tax dated 12.3.2007).

The circular says that 'money changing' and 'foreign exchange broking' are two different activities and, therefore, money changing cannot be taken as taxable under the heading 'foreign exchange broking'. This conclusion is right. But the logic that has been cited to prove this point is wrong. The logic that has been given in the circular is that the foreign exchange broker providing foreign exchange broking service does not hold title to the foreign exchange. The defect in the logic is that it assumes that the ownership of goods on the basis of which the service is given, is a necessary ingredient for a service to be a service. Actually ownership has nothing to do with the service provided. There are many services where the ownership of the goods on the basis of which the service is provided does not belong to the service provider. Advertising agency service, air travel agent's service, auction service, beauty treatment service, chartered accountants' service, cleaning service, opinion poll service, etc, are some of the examples where there is no question of ownership of the goods on the basis of which service is provided. So when it is said in the circular that the foreign exchange broker providing foreign exchange broking service does not hold title to the foreign exchange, it gives the wrong impression that ownership is the basis of the distinction between 'money changing' and 'foreign exchange broking'. Actually the correct distinction is, what has been written in the initial portion of the circular, that they are two distinctly different activities. This logic was enough to distinguish between the two. The second logic about the ownership has unduly clouded the issue while linking the service with ownership.

The basic concept of taxable event has to be understood in this context in the interest of clear thinking. Taxable event for import duty is the act of import, for excise duty it is the act of manufacture, and for sales tax it is the act of sale, as has been enunciated as a basic principle by a full Bench of the Supreme Court in a landmark judgement in 1963 in the case of Re: Sea Customs Act, 1878, reported in 1963 AIR SC 1760. In the same vein, the taxable event for service tax is the act of providing service. Ownership is not relevant as has been held in several judgements by the Supreme Court. In Empire Industries Ltd versus UOI "" 1985(20) ELT179 (SC), the Supreme Court held that "the fact, that the petitioners are not the owners of the end-product, is irrelevant. Taxable event is manufacture""not ownership". In the case of Ujagar Prints versus UOI "" 1988(38) ELT535 (SC), the Supreme Court again held that taxable event is independent of ownership of goods. In 1996 also the same principle has been reiterated by the Supreme Court in the case of CCE versus MM Khambatwala "" 1996(84) ELT 161(SC).

The conclusion is that taxable events for goods and services are based on the same principle that they do not depend on ownership. The above service tax circular should be amended to delete the sentence, which links taxable service with ownership.