In the definition of ‘service’ contained in clause (44) of section 65B of the Act it has also been
stated that service includes a declared service. The phrase ‘declared service’ is also defined
in the said section as an activity carried out by a person for another for consideration and
specified in section 66E of the Act. The following nine activities have been specified in section
66E:

1. renting of immovable property;
2. construction of a complex, building, civil structure or a part thereof, including a
complex or building intended for sale to a buyer, wholly or partly, except where the
entire consideration is received after issuance of certificate of completion by a
competent authority;
3. temporary transfer or permitting the use or enjoyment of any intellectual property
right;
4. development, design, programming, customization, adaptation, up gradation,
enhancement, implementation of information technology software;
5. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation,
or to do an act;
6. transfer of goods by way of hiring, leasing, licensing or any such manner without
transfer of right to use such goods;
7. activities in relation to delivery of goods on hire purchase or any system of payment
by instalments;
8. service portion in execution of a works contract;
9. service portion in an activity wherein goods, being food or any other article of human
consumption or any drink (whether or not intoxicating) is supplied in any manner as
part of the activity.
The above activities when carried out by a person for another for consideration would amount
to provision of service. Most of these services are presently also being taxed except in so far
as Sl. No.5 is concerned. It is clarified that they are amply covered by the definition of service
but have been declared with a view to remove any ambiguity for the purpose of uniform
application of law all over the country.
6.1 Renting of Immovable Property
Renting has been defined in section 65B as ‘‘allowing, permitting or granting access, entry,
occupation, usageor any such facility, wholly or partly, in an immovable property, with or without
the transfer of possession or control of the said immovable property and includes letting,
leasing, licensing or other similar arrangements in respect of immovable property’
6.1.1 Is renting of all kinds of immovable properties taxable?
No. Renting of certain kinds of immovable properties is specified in the negative list. These
are –
• renting of vacant land, with or without a structure incidental to its use, relating to
agriculture. (Sl. no. (d) (iv) of Exhibit A1)
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• renting of residential dwelling for use as residence (Sl. No. (m) of Exhibit A1)
• renting out of any property by the Reserve Bank of India
• renting out of any property by a Government or a local authority to a non-business
entity.
Renting of all other immovable properties would be taxable unless covered by an exemption
(refer 6.1.2).
6.1.2 Are there any exemptions in respect of renting of immovable property?
Yes. These are:–
• Threshold level exemption up to Rs. 10 lakh.
• Renting of precincts of a religious place meant for general public.
• Renting of a hotel, inn, guest house, club, campsite or other commercial places
meant for residential or lodging purposes, having declared tariff of a room below
rupees one thousand per day or equivalent.
• Renting to an exempt educational institution
6.1.3 Would permitting usage of a property for a temporary purpose like conduct of
a marriage or any other social function be taxable?
Yes. As per definition allowing or permitting usage of immovable property, without transferring
possession of such property, is also renting of immoveable property.
6.1.4 Would activities referred to in column 1 of a table below be chargeable to service
tax?
S. No. Journey Taxability
1. Renting of property to an educational body Exempted if provided to an educational institution
for the purpose of education which is exempt from
the levy of service tax; to others will be taxable.
2. Renting of vacant land for animal Not chargeable to service tax as it is covered in the
husbandry or floriculture negative list entry relating to agriculture
3. Permitting use of immoveable property for Chargeable to service tax as permitting usage of
placing vending/dispensing machines space is covered in the definition of renting
4. Allowing erection of a communication Chargeable to service tax as permitting usage of
tower on a building for consideration. space is covered in the definition of renting
5. Renting of land or building for Chargeable to service tax as there is no specific
entertainment or sports exemption.
6. Renting of theatres by owners to film Chargeable to service tax as the arrangement
distributors (including under a profit- amounts to renting of immovable property.
sharing arrangement)
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6.1.5 Whether hotels/restaurants/convention centres letting out their halls, rooms
etc. for social, official or business or cultural functions fall within the scope of this
declared list service?
Halls, rooms etc. let out by hotels/restaurants for a consideration for organizing social, official
or business or cultural functions are covered within the scope of renting of immovable property
and would be taxable if other elements of taxability are present.
6.2 Construction of a complex, building, civil structure or a part thereof,
including a complex or building intended for sale to a buyer, wholly
or partly, except where the entire consideration is received after
issuance of certificate of completion by a competent authority.
This service is already taxable as part of construction of residential complex service under
clause (zzzh) of sub-section 105 of section 65 of the Act and as part of service in relation to
commercial or industrial construction under clause (zzq) of sub-section 105 of section 65 of
the Act. This entry covers the services provided by builders or developers or any other person,
where building complexes, civil structure or part thereof are offered for sale but the payment
for such building or complex or part thereof is received before the issuance of completion
certificate by a competent authority.
6.2.1 What would be the liability to pay service tax on flats/houses agreed to be given
by builder/developer to the land owner towards the land /development rights and to
other buyers. If payable, how would the services be valued?
Here two important transactions are identifiable: (a) sale of land by the landowner which is
not a taxable service; and (b) construction service provided by the builder/developer. The
builder/developer receives consideration for the construction service provided by him, from
two categories of service receivers: (a) from landowner: in the form of land/development
rights; and (b) from other buyers: normally in cash.
Construction service provided by the builder/developer is taxable in case any part of the
payment/development rights of the land was received by the builder/ developer before the
issuance of completion certificate and the service tax would be required to be paid by builder/
developers even for the flats given to the land owner.
It may be pointed out that in a recent judgement passed by the Mumbai High Court in the case
of Maharashtra Chamber of Housing Industry and Others vs. Union of India [012-TIOL-78-
HC-Mum-ST] has upheld the Constitutional validity of levy of service tax, under clauses (zzzh)
and (zzzzu) of section 65, on similar construction services provided by a builder. A relevant
portion of the judgement is reproduced below-
“29. The charge of tax under Section 66 of the Finance Act is on the taxable services
defined in clause (105) of Section 65. The charge of tax is on the rendering of a taxable
service. The taxable event is the rendering of a service which falls within the description set
out in sub-clauses (zzq), (zzzh) and (zzzzu). The object of the tax is a levy on services which
are made taxable. The fact that a taxable service is rendered in relation to an activity which
occurs on land does not render the charging provision as imposing a tax on land and
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buildings. The charge continues to be a charge on taxable services. The charge is not a
charge on land or buildings as a unit. The tax is not on the general ownership of land. The
tax is not a tax which is directly imposed on land and buildings. The fact that land is subject
to an activity involving construction of a building or a complex does not determine the
legislative competence of Parliament. The fact that the activity in question is an activity
which is rendered on land does not make the tax a taxon land. The charge is on rendering
a taxable service and the fact that the service is rendered in relation to land does not alter
the nature or character of the levy. The legislature has expanded the notion of taxable
service by incorporating within the ambit of clause (zzq) and clause (zzzh) services rendered
by a builder to the buyer in the course of an intended sale whether before, during or after
construction. There is a legislative assessment underlying the imposition of the tax which
is that during the course of a construction related activity, a service is rendered by the
builder to the buyer. Whether that assessment can be challenged in assailing constitutional
validity is a separate issue which would be considered a little later. At this stage, what merits
emphasis is that the charge which has been imposed by the legislature is on the activity
involving the provision of a service by a builder to the buyer in the course of the execution
of a contract involving the intended sale of immovable property.
30. Parliament, in bringing about the amendment in question has made a legislative
assessment to the effect that a service is rendered by builders to buyers during the course
of construction activities. In our view, that legislative assessment does not impinge upon
the constitutional validity of the tax once, the true nature and character of the tax is held not
to fall within the scope of Entry 49 of List II. So long as the tax does not fall within any head
of legislative power reserved to the States, the tax must of necessity fall within the legislative
competence of Parliament. This is a settled principle of law, since the residuary power to
legislate on a field of legislation which does not fall within the exclusive domain of the
States is vested in Parliament under Article 248 read with Entry 97 of List I.”
Value, in the case of flats given to first category of service receiver will be the value of the land
when the same is transferred and the point of taxation will also be determined accordingly.
6.2.2 What would be the service tax liability in the following model - land is owned by
a society, comprising members of the society with each member entitled to his share
by way of an apartment. Society /individual flat owners give ‘No Objection Certificate’
(NOC) or permission to the builder/developer, for re-construction. The builder/
developer makes new flats with same or different carpet area for original owners of
flats and additionally may also be involved in one or more of the following: (i) construct
some additional flats for sale to others; (ii) arrange for rental accommodation or rent
payments for society members/original owners for stay during the period of reconstruction;
(iii) pay an additional amount to the original owners of flats in the
society.
Under this model, the builder/developer receives consideration for the construction service
provided by him, from two categories of service receivers. First category is the society/
members of the society, who transfer development rights over the land (including the permission
for additional number of flats), to the builder/developer. The second category of service
receivers consist of buyers of flats other than the society/members. Generally, they pay by
cash.
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Re-construction undertaken by a building society by directly engaging a builder/developer
will be chargeable to service tax as works contract service for all the flats built now.
6.2.3 When a certain number of flats are given by the builder/developer to a land
owner in a collaborative agreement to construct, in lieu of the land or development
rights transferred, will such transferee be required to pay service tax on further sale
of flats to customers?
Yes. The service tax will be required to be paid by such transferee if any consideration is
received by him from any person before the receipt of completion certificate.
6.2.4 What would be the service tax liability on conversion of any hitherto untaxed
construction of complex or part thereof into a building or civil structure to be used
for commerce or industry, after lapse of a period of time?
Mere change in use of the building does not involve any taxable service. If the renovation
activity is done on such a complex on contract basis the same would be a works contract as
defined in clause (54) of section 65B service portion, which would also be taxable if other
ingredients of taxability are present.
6.2.5 What would be the service tax liability on Build- Operate - Transfer (BOT)
Projects?
Many variants of this model are being followed in different regions of the country, depending
on the nature of the project. Build-Own-Operate-Transfer (BOOT) is a popular variant. Generally
under BOT model, Government, concessionaire (who may be a developer/builder himself or
may be independent) and the users are the parties. Risk taking and sharing ability of the
parties concerned is the essence of a BOT project. Government by an agreement transfers
the ‘right to use’ and/or ‘right to develop’ for a period specified, usually thirty years or near
about, to the concessionaire.
Transactions involving provision of service take place usually at three different levels: firstly,
between Government and the concessionaire; secondly, between concessionaire and the
contractor and thirdly, between concessionaire and users.
At the first level, Government transfers the right to use and/or develop the land, to the
concessionaire, for a specific period, for construction of a building for furtherance of business
or commerce (partly or wholly). Consideration for this taxable service may be in the nature of
upfront lease amount or annual charges paid by the concessionaire to the Government. Such
services provided by the “Government’ would be in the negative list entry contained in clause
(a) of section 66D unless these services qualify as ‘support services provided to business
entities’ under exception sub-clause (iv) to clause (a) of section 66D. ‘Support services have
been defined in clause (49) of section 65B as ‘infrastructural, operational, administrative,
logistic marketing or any other support of any kind comprising functions that entities carry out
in the ordinary course of operations themselves but may obtain as services by outsourcing
from others for any reason whatsoever and shall include advertisement and promotion,
construction or works contract, renting of movable or immovable property, security, testing
and analysis’. If the nature of concession is such that it amounts to ‘renting of immovable
property service’ then the same would be taxable. The tax is required to be paid by the
government as there is no reverse charge for services relating to renting of immovable property.

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In this model, though the concessionaire is undertaking construction of a building to be used
wholly or partly for furtherance of business or commerce, he will not be treated as a service
provider since such construction has been undertaken by him on his own account and he
remains the owner of the building during the concession period. However, if an independent
contractor is engaged by a concessionaire for undertaking construction for him, then service
tax is payable on the construction service provided by the contractor to the concessionaire.
At the third level, the concessionaire enters into agreement with several users for commercially
exploiting the building developed/constructed by him, during the lease period. For example,
the user may be paying a rent or premium on the sub-lease for temporary use of immovable
property or part thereof, to the concessionaire. At this third level, concessionaire is the service
provider and user of the building is the service receiver. Service tax would be leviable on the
taxable services provided by the concessionaire to the users if the ingredients of taxability
are present.
There could be many variants of the BOT model explained above and implications of tax may
differ. For example, at times it is possible that the concessionaire may outsource the
management or commercial exploitation of the building developed/constructed by him to
another person and may receive a pre-determined amount as commission. Such commission
would be a consideration for taxable service and liable to service tax.
6.2.6 If the builder instead of receiving consideration for the sale of an apartment
receives a fixed deposit, which it converts after the completion of the building into
sales consideration, will it amount to receiving any amount before the completion of
service.
This may be a colorable device wherein the consideration for provision of construction service
is disguised as fixed deposit, which is unlikely to be returned. In any case the interest earned
by the builder on such fixed deposits will be a significant amount received prior to the
completion of the immovable property. As clarified at serial no. 5 of the table in point no 2.3.2
interest in such cases would be considered as part of the gross amount charged for the
provision of service and the service of construction will be taxable.
6.2.7 In certain States requirement of completion certificate are waived of for certain
specified types of buildings. How would leviability of service tax be determined in
such cases?
In terms of Explanation to clause (b) of section 66E in such cases the completion certificate
issued by an architect or a chartered engineer or a licensed surveyor of the respective local
body or development or planning authority would be treated as completion certificate for the
purposes of determining chargeability of service tax.
6.2.8 If the person who has entered into a contract with the builder for a flat for
which payments are to be made in 12 installments depending on the stage of
construction and the person transfers his interest in the flat to a buyer after paying 7
installments, would such transfer be an activity chargeable to service tax?
Such transfer does not fall in this declared service entry as the said person is not providing
any construction service. In any case transfer of such an interest would be transfer of a benefit
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to arise out of land which as per the definition of immoveable property given in the General
Clauses Act, 1897 is part of immoveable property. Such transfer would therefore be outside
the ambit of ‘service’ being a transfer of title in immoveable property. Needless to say that
service tax would be chargeble on the seven installments paid by the first allottee and also on
subsequent installments paid by the transferee.
6.3 Temporary transfer or permitting the use or enjoyment of any
intellectual property right
6.3.1What is the scope of the term ‘intellectual property right’?
‘Intellectual property right’ has not been defined in the Act. The phrase has to be understood
as in normal trade parlance as per which intellectual property right includes the following:-
• Copyright
• Patents
• Trademarks
• Designs
• Any other similar right to an intangible property
6.3.2 Is the IPR required to be registered in India? Would the temporary transfer of a
patent registered in a country outside India also be covered under this entry?
Since there is no condition regarding the law under which an intellectual right should be
registered, temporary transfer of a patent registered outside India would also be covered in
this entry. However, it will become taxable only if the place of provision of service of temporary
transfer of intellectual property right is in taxable territory.
6.4 Development, design, programming, customization, adaptation,
up gradation, enhancement, implementation of information technology
software
The term ‘information technology software’ has been defined in section 65B of the Act as ‘any
representation of instructions, data, sound or image, including source code and object code,
recorded in a machine readable form, and capable of being manipulated or providing
interactivity to a user, by means of a computer or an automatic data processing machine or
any other device or equipment’.
6.4.1 Would sale of pre-packaged or canned software be included in this entry?
No. It is a settled position of law that pre-packaged or canned software which is put on a
media is in the nature of goods [Supreme Court judgment in case of Tata Consultancy Services
vs State of Andhra Pradesh [2002(178) ELT 22(SC) refers]. Sale of pre-packaged or canned
software is, therefore, in the nature of sale of goods and is not covered in this entry.
6.4.2 Is on site development of software covered under this entry?
Yes. On site development of software is covered under the category of development of
information technology software.
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6.4.3 Would providing advice, consultancy and assistance on matters relating to
information technology software be chargeable to service tax?
These services may not be covered under the declared list entry relating to information
technology software. However, such activities when carried out by a person for another for
consideration would fall within the definition of service and hence chargeable to service tax if
other requirements of taxability are satisfied.
6.4.4 Would providing a license to use pre-packaged software be a taxable service?
The following position of law needs to be appreciated to determine whether a license to use
pre packaged software would be goods-
• As held by the Hon’ble Supreme Court in the case of Tata Consultancy Services vs.
State of Andhra Pradesh [2002(178) ELT 22(SC)] ] pre-packaged software or canned
software or shrink wrapped software put on a media like is goods. Relevant portion
of para 24 of the judgment is reproduced below-
“A software programme may consist of various commands which enable the
computer to perform a designated task. The copyright in that programme may
remain with the originator of the programme. But the moment copies are made
and marketed, it becomes goods, which are susceptible to sales tax. Even
intellectual property, once it is put on to a media, whether it be in the form of books
or canvas (in case of painting) or computer discs or cassettes, and marketed
would become “goods”. We see no difference between a sale of a software
programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale
of a film on a video cassette/CD. In all such cases, the intellectual property has
been incorporated on a media for purposes of transfer. Sale is not just of the
media which by itself has very little value. The software and the media cannot be
split up. What the buyer purchases and pays for is not the disc or the CD. As in the
case of paintings or books or music or films the buyer is purchasing the intellectual
property and not the media i.e. the paper or cassette or disc or CD. Thus a
transaction sale of computer software is clearly a sale of “goods” within the meaning
of the term as defined in the said Act. The term “all materials, articles and
commodities” includes both tangible and intangible/incorporeal property which is
capable of abstraction, consumption and use and which can be transmitted,
transferred, delivered, stored, possessed etc. The software programmes have all
these attributes.”
• Therefore, in case a pre-packaged or canned software or shrink wrapped software
is sold then the transaction would be in the nature of sale of goods and no service
tax would be leviable.
• The judgement of the Supreme Court in Tata Consultancy Service case is applicable
in case the pre-packaged software is put on a media before sale. In such a case the
transaction will go out of the ambit of definition of service as it would be an activity
involving only a transfer of title in goods.
• As per the definition of ‘service’ as contained in clause (44) of section 65(B) only
those transactions are outside the ambit of service which constitute only a transfer
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of title in goods or such transfers which are deemed to be a sale within the meaning
of Clause 29(A) of article 366 of the Constitution. The relevant category of deemed
sale is transfer of right to use goods contained in sub-clause (d) of clause (29A) of
the Constitution.
• ‘Transfer of right to use goods’ is deemed to be a sale under Article 366(29A) of
the Constitution of India and transfer of goods by way of hiring, leasing, licensing or
any such manner without transfer of right to use such goods is a declared service
under clause (f) of section 66E.
• Transfer of right to use goods is a well-recognized constitutional and legal concept.
Every transfer of goods on lease, license or hiring basis does not result in transfer
of right to use goods. For understanding the concept of transfer of right to use please
refer to point no 6.6.1.
• A license to use software which does not involve the transfer of ‘right to use’ would
neither be a transfer of title in goods nor a deemed sale of goods. Such an activity
would fall in the ambit of definition of ‘service’ and also in the declared service
category specified in clause (f) of section 66E.
• Therefore, if a pre-packaged or canned software is not sold but is transferred under
a license to use such software, the terms and conditions of the license to use such
software would have to be seen to come to the conclusion as to whether the license
to use packaged software involves transfer of ‘right to use’ such software in the
sense the phrase has been used in sub-clause (d) of article 366(29A) of the
Constitution. (See point no 5.6.1).
• In case a license to use pre-packaged software imposes restrictions on the usage
of such licenses, which interfere with the free enjoyment of the software, then such
license would not result in transfer of right to use the software within the meaning of
Clause 29(A) of Article 366 of the Constitution. Every condition imposed in this
regard will not make it liable to service tax. The condition should be such as restraints
the right to free enjoyment on the same lines as a person who has otherwise
purchased goods is able to have. Any restriction of this kind on transfer of software
so licensed would tantamount to such a restraint.
• Whether the license to use software is in the paper form or in electronic form makes
no material difference to the transaction.
• However, the manner in which software is transferred makes material difference to
the nature of transaction. If the software is put on the media like computer disks or
even embedded on a computer before the sale the same would be treated as goods.
If software or any programme contained is delivered online or is down loaded on
the internet the same would not be treated as goods as software as the judgment of
the Supreme Court in Tata Consultancy Service case is applicable only in case the
pre-packaged software is put on a media before sale.
• Delivery of content online would also not amount to a transaction in goods as the
content has not been put on a media before sale. Delivery of content online for
consideration would, therefore, amount to provision of service.
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6.4.5 In case contract is given for customized development of software and the
customized software so developed is delivered to the client on media like a CD then
would the transaction fall in this declared entry or would it be covered by the TCS
Judgement?
In such a case although the software is finally delivered in the form of goods, since the contract
is essentially for design and development of software it would fall in the declared list entry.
Such a transaction would be in the nature of composite transaction involving an element of
provision of service, in as much as the contract is for design and development of software
and also an element of transfer of title in goods, in as much as the property in CD containing
the developed software is transferred to the client. However, the CD remains only a media to
transmit or deliver the outcome of which is essentially and pre-dominantly a contract of service.
Therefore, such a transaction would not be excluded from the ambit of the definition of ‘service’
as the transaction does not involve ‘only’ transfer of title in goods and dominant nature of the
transaction is that of provision of service.
6.5 Activities in relation to delivery of goods on hire purchase or any
system of payment by instalments
6.5.1 Is the delivery of goods on hire purchase of any system of payment by
installments taxable?
No. The delivery of goods on hire purchase or any system of payment on installment is not
chargeable to service tax because as per Article 366(29A) of the Constitution of India such
delivery of goods is deemed to be a sale of goods.(For guidance on this aspect please refer
to point no. 2.7 of this Guide) However activities or services provided in relation to such
delivery of goods are covered in this declared list entry.
6.5.2 What is the scope of the phrase ‘delivery of goods on hire-purchase or any
system of payment by installments’?
Section 2 of the Hire Purchase Act, 1972 defines a “hire purchase agreement’ as ‘an
agreement under which goods are let out on hire and under which the hirer has the option to
purchase them in accordance with the terms of the agreement and includes an agreement
under which-
(i) possession of goods is delivered by the owner thereof to a person on condition that
such person pays the agreed amount in periodical installments, and
(ii) the property in the goods is to pass to such person on the payment of the last of
such installments, and
(iii) such person has a right to terminate the agreement at any time before the property
so passes.’
As per the Sales of Goods Act by Mulla (Seventh Edition. Page 14) delivery is ‘voluntary
dispossession in favour of another’ and that ‘in all cases the essence of delivery is that the
deliverer, by some apt and manifest act, puts the deliveree in the same position of control
over thing, either directly or through a custodian, which he held himself immediately before
the act’.
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The nature of such arrangements has been explained by the Supreme Court in the case of
Association of Leasing & Financial Service Companies Vs Union Of India [2010 (20) S.T.R.
417 (S.C.)]. The relevant extract in para 20 of the said judgment is reproduced below:
“20. According to Sale of Goods Act by Mulla [6th Edition] a common method of selling goods is by
means of an agreement commonly known as a hire-purchase agreement which is more aptly
described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets
out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments.”
Key ingredients of the deemed sale category of ‘delivery of goods on hire-purchase or any
system of payment by installments’, therefore are-
• Transfer of possession (and not just of custody)
• The hirer has the option or obligation to purchase the goods in accordance with the
terms of the agreement.
6.5.3 What is the difference between a normal hiring agreement and a hire-purchase
agreement?
In a mere hiring agreement the hirer has no option to purchase the goods hired and the risks
and rewards incidental to ownership of goods remain with the owner and are not transferred
to the hirer. In a hire-purchase agreement the hirer has an option or an obligation to purchase
goods.
6.5.4 Are ‘finance leases’, ‘operating leases’ and ‘capital leases’ covered as ‘delivery
of goods on hire purchase or any system of payment of installments’?
Such leases would be covered only if the terms and conditions of such leases have the
ingredients as explained above. Normally in an ‘operating lease’ the lease is for a term shorter
than property’s useful life and the lessor is typically responsible for taxes and other expenses
on the property. The lessee does not have an option to purchase the property at the end of the
period of lease. Such arrangements do not qualify as ‘delivery of goods on hire purchase or
any system of payment of installments’.
On the other hand ‘financial leases’ or ‘capital leases’ strongly resemble security arrangements
and are entered into for financing the asset. The lessee pays maintenance costs and taxes
and has the option of purchasing the lease end. Such arrangements resemble a hire-purchase
agreement and would fall under the said ‘deemed sale’ category. The essence of this deemed
sale category is that the arrangement under which the goods are ‘delivered’ should be in the
nature of a financing arrangement wherein the lessee pays maintenance costs and taxes and
has the option of purchasing the asset so delivered at lease end.
It may, however, be pointed out that in case an ‘operating lease’ has elements of transfer of
‘right to use’ then the same would be covered in the other ‘deemed sale’ category pertaining
to ‘transfer of right to use any goods’
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6.5.5 If delivery of goods on hire purchase or any system of payment on installment
is deemed to be sale of goods what are the activities in relation to such delivery
which are covered in the declared service?
It has been held by Supreme court in the case of Association Of Leasing & Financial Service
Companies Vs Union Of India[2010 (20) S.T.R. 417 (S.C.)] that in equipment leasing/hirepurchase
agreements there are two different and distinct transactions, viz., the financing
transaction and the equipment leasing/hire-purchase transaction and that the financing
transaction, consideration for which was represented by way of interest or other charges like
lease management fee, processing fee, documentation charges and administrative fees,
which is chargeable to service tax. Therefore, such financial services that accompany a hirepurchase
agreement fall in the ambit of this entry of declared services.
6.5.6 Is service tax leviable on the entire quantum of interest and other charges
received in relation to a hire purchase?
No. In terms of the exemption notification relating to such activities, service tax is leviable only
on 10% of the amount representing interest plus other charges explicitly charged as mentioned
above.
6.6 Transfer of goods by way of hiring, leasing, licensing or any such
manner without transfer of right to use such goods
6.6.1 What is the meaning and scope of the phrase ‘transfer of right to use such
goods’
Transfer of right to use goods is a well recognized constitutional and legal concept. Every
transfer of goods on lease, license or hiring basis does not result in transfer of right to use
goods. ‘Transfer of right of goods’ involves transfer of possession and effective
control over such goods in terms of the judgment of the Supreme Court in the case of
State of Andhra Pradesh vs RashtriyaIspat Nigam Ltd [Judgment dated 6/2/2002 in Civil
Appeal no. 31 of 1991]. Transfer of custody along with permission to use or enjoy such goods,
per se, does not lead to transfer of possession and effective control.
The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited vs
Union of India [2006(2)STR161(SC)] to determine whether a transaction involves transfer of
right to use goods, which has been followed by the Supreme Court and various High Courts,
is as follows:
• There must be goods available for delivery;
• There must be a consensus ad idem as to the identity of the goods;
• The transferee should have legal right to use the goods – consequently all legal
consequences of such use including any permissions or licenses required therefore
should be available to the transferee;
• For the period during which the transferee has such legal right , it has to be the
exclusion to the transferor – this is the necessary concomitant of the plain language
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of the statute, viz., a ‘transfer of the right to use’ and not merely a license to use the
goods;
• Having transferred, the owner cannot again transfer the same right to others.
Whether a transaction amounts to transfer of right or not cannot be determined with reference
to a particular word or clause in the agreement. The agreement has to be read as a whole, to
determine the nature of the transaction.
6.6.2 Whether the transactions listed in column 1 of the table below involve transfer
of right to use goods?
S.No. Nature of transaction Whether transaction involves transfer of right to use
1 A car is given in hire by a person to Right to use is not transferred as the car owner retains
a company along with a driver on the permissions and licenses relating to the cab.
payment of charges on per Therefore possession and effective control remains with
month/mileage basis the owner (Delhi High Court Judgment in the case of
International Travel House in Sales Tax Appeal
no 10/2009 refers). The service is, therefore covered in
the declared list entry.
2 Supply of equipment like excavators, The transaction will not involve transfer of right to use
wheel loaders, dump trucks, cranes, such equipment as in terms of the agreement the
etc for use in a particular project possession and effective control over such equipment has
where the person to whom such not been transferred even though the custody may have
equipment is supplied is subject to been transferred along with permission to use such
such terms and conditions in the equipment. The receiver is not free to use such
contract relating to the manner of equipment in any manner as he likes and conditions have
use of such equipment, return of been imposed on use and control of such equipment.
such equipment after a specified
time, maintenance and upkeep of
such equipment.
3. Hiring of bank lockers The transaction does not involve the right to use goods
as possession of the lockers is not transferred to the
hirer even though the contents of the locker would be in
the possession of the hirer.(refer to Andhra Pradesh
High Court Judgment in the case of State Bank of India
Vs State of Andhra Pradesh)
4. Hiring out of vehicles where it is No transfer of right to use goods as effective control and
the responsibility of the owner to possession is not transferred ( Allahabad High Court
abide by all the laws relating to judgement in Ahuja Goods Agency vs State of UP
motor vehicles [(1997)106STC540] refers)
5 Hiring of audio visual equipment No transfer of right to use goods as effective control and
where risk is of the owner possession is not transferred
Note: The list in the table above is only illustrative to demonstrate how courts have interpreted terms and
conditions of various types of contracts to see if a transaction involve transfer of right to use goods. The nature
of each transaction has to be examined in totality keeping in view all the terms and conditions of an agreement
relating to such transaction.
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6.7 Agreeing to the obligation to refrain from an act, or to tolerate an
act or a situation, or to do an act
In terms of this entry the following activities if carried out by a person for another for
consideration would be treated as provision of service.
• Agreeing to the obligation to refrain from an act.
• Agreeing to the obligation to tolerate an act or a situation.
• Agreeing to the obligation to do an act.
6.7.1 Would non-compete agreements be considered a provision of service?
Yes. By virtue of a non-compete agreement one party agrees, for consideration, not to compete
with the other in any specified products, services, geographical location or in any other manner.
Such action on the part of one person is also an activity for consideration and will be covered
by the declared services.
6.8 Service portion in execution of a works contract
Works contract has been defined in section 65B of the Act as a contract wherein transfer of
property in goods involved in the execution of such contract is leviable to tax as sale of goods
and such contract is for the purpose of carrying out construction, erection, commissioning,
installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable
or immoveable property or for carrying out any other similar activity or a part thereof in relation
to such property.
Typically every works contract involves an element of sale of goods and provision of service.
In terms of Article 366 (29A) of the Constitution of India transfer of property in goods involved
in execution of works contract is deemed to be a sale of such goods. It is a well settled
position of law, declared by the Supreme Court in BSNL‘s case [2006(2) STR 161 (SC)], that
a works contract can be segregated into a contract of sale of goods and contract of provision
of service. This declared list entry has been incorporated to capture this position of law in
simple terms.
It may be pointed out that prior to insertion of clause (29A) in article 366 of the Constitution
defining certain categories of transactions as ‘deemed sale’’ of goods the position of law, as
declared by the Supreme Court in Gannon Dunkerley’s case (AIR1958SC560) was that a
works contract was essentially a contract of service and no sales tax could be levied on
goods transferred in the course of execution of works contract. It is only after the constitutional
amendment that VAT or sales tax is leviable on such goods. The remaining portion of the
contract remains a contract for provision of service.
Further, with a view to bring certainty and simplicity, the manner of determining the value of
service portion in works contracts has been given in rule 2A of the Valuation Rules. For details
on valuation please refer to point no. 8.2 of this Guide.
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6.8.1 Would labour contracts in relation to a building or structure be treated as a
works contract?
No. Labour Contracts do not fall in the definition of works contract. It is necessary that there
should be transfer of property in goods involved in the execution of such contract which is
leviable to tax as sale of goods. Pure labour contracts are therefore not works contracts and
would be leviable to service tax like any other service and on full value.
6.8.2 Would contracts for repair or maintenance of motor vehicles be treated as ‘works
contracts’? If so, how would the value be determined for ascertaining the value portion
of service involved in execution of such a works contract?
Yes. Contracts for repair or maintenance of moveable properties are also works contracts if
property in goods is transferred in the course of execution of such a contract. Service tax has
to be paid in the service portion of such a contract.
6.8.3 Would contracts for construction of a pipe line or conduit be covered under
works contract?
Yes. As pipeline or conduits are structures on land contracts for construction of such structure
would be covered under works contract.
6.8.4 Would contracts for erection commissioning or installation of plant, machinery,
equipment or structures, whether prefabricated or otherwise, be treated as a works
contract?
Such contracts would be treated as works contracts if transfer of property in goods is involved
in such a contract.
6.8.5. Would contracts for painting of a building, repair of a building, renovation of a
building, wall tiling, flooring be covered under ‘works contract’?
Yes, if such contracts involve provision of materials as well.
6.8.6 Is the definition of ‘works contract’ in clause (54) of section 65B in line with the
definition of ‘works contract’ in various State VAT laws?
The definition of ‘works contract’ in clause (54) of section 65B covers such contracts which
involve transfer of property in goods and are for carrying out the activities specified in the
said clause (54) in respect of both moveable and immoveable properties. This is broadly in
consonance with the definition of ‘works contract’ in most of the State VAT laws. However,
each State has defined ‘works contracts’ differently while dealing with works contract as a
category of deemed sales. There could, therefore, be variations from State to State. For
service tax purposes the definition in clause (54) of section 65B would alone be
applicable.
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6.8.7 What is the way to segregate service portion in execution of a works contract
from the total contract or what is the manner of determination of value of service
portion involved in execution of a works contract?
For detailed discussion on this topic please refer to Guidance Note 8, in particular point no
8.2.
6.9 Service portion in an activity wherein goods, being food or any
other article of human consumption or any drink (whether or not
intoxicating) is supplied in any manner as part of the activity
6.9.1 What are the activities covered in this declared list entry?
The following activities are illustration of activities covered in this entry-
• Supply of food or drinks in a restaurant;
• Supply of foods and drinks by an outdoor caterer.
In terms of article 366(29A) of the Constitution of India supply of any goods, being food or any
other article of human consumption or any drink (whether or not intoxicating) in any manner as
part of a service for cash, deferred payment or other valuable consideration is deemed to be
a sale of such goods. Such a service therefore cannot be treated as service to the extent of
the value of goods so supplied. The remaining portion however constitutes a service. It is a
well settled position of law, declared by the Supreme Court in BSNL‘s case
[2006(2)STR161(SC)], that such a contract involving service along with supply of such goods
can be dissected into a contract of sale of goods and contract of provision of service. This
declared list entry is has been incorporated to capture this position of law in simple terms.
6.9.2 Are services provided by any kind of restaurant, big or small, covered in this