Budget 2008-09 : Artificial definition for a service

EXPERT EYE

It is judicially settled that in a fiscal statute definitions can be artificial. But how artificial can a definition be? Can it be so artificial that the item defined has no nexus or connection with the definition? The answer is 'no'.

The Supreme Court while dealing with the concept of manufacture in the case of Commercial Taxation Officer vs Rajasthan Taxchem, 2007(209)ELT165(SC), has held that fuel can be included in the definition of 'raw material' not only because it is mentioned in the inclusive definition of raw material but also because it is in fact used in the manufacture of polyester yarn, though indirectly.

The Supreme Court has gone into detailed discussion to prove that fuel is an indirect raw material. The Supreme Court has not said that just because fuel has been artificially included in the definition of raw material, it is a raw material.

This judgement proves that the artificial definition cannot be widely different from the basic concept of the goods which are being defined.

The nexus, therefore, remains justiceable. In the above context, I propose to consider in this treatise the wholly artificial definition of "the activities of money changers" as service as has been done in the Budget 2008-09.

The Budget has done the following: The scope of specified taxable service has been amended to include "purchase or sale of foreign currency, including money changing, by an authorized dealer or an authorized money changer, under banking and other financial service".

Now two questions arise in respect of the legality of the above amendment. The first is whether an activity of "purchase or sale of foreign currency, including money changing" is a service or not. By the very description of the activity, it is one of purchase and sale which means trade with foreign currency.

A moneychanger is an intermediary who buys and sells foreign exchange on commission or brokerage basis.

He owns title on the goods. He first buys it from the banks and then sells them to customers on profit or purchases from others again on profit.

It is, therefore, an activity of possessing something and then selling it or again buying it. It is not a service which the money changer is providing. It is a trading activity. This distinction between sale and service has to be clearly understood.

For example, if you engage a painter to sketch your portrait, he would, at the end of the session, give you a painting, which has physical dimensions, and the essence of the transaction is to engage the skill and labour of the painter.

Here it is a service. However, if one goes to the studio of the painter and purchases a painting, it is a transaction of sale.

In case of a sale, the goods exist as property of the seller before these were handed over to the buyer but in case of service, the goods emerge by way of or in the course of rendering the service.

If the trading activity of money changer is defined as service, VAT and Service Tax will be the same.

This leads to an absurd situation. The second issue is that when something is not a service, whether it can be defined as service by a mere legislation.

Going by the principle enunciated in the Supreme Court judgement quoted above, there has to be a nexus, that is, similarity, between the item defined and the definition. In this case trade and services are two widely different concepts.

Therefore, there is no question of defining trade as service. The conclusion is that this amendment is conceptually wrong and legally untenable.

smukher2000@yahoo.com