'Non-Performance' also a Service - Liable to Service Tax? Retrospective Objection by CAG!
MORE than six years ago, in DDT 330 - 27 03 2006, we had mentioned that Obligation to refrain from an act or to tolerate an act or situation, is also a service in some countries. The Indian Service Tax Department was sure to adopt this theory; it is surprising they waited for six years.
In the Finance Bill 2012, as per clause (e) of Section 66E, agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; is a declared service and this is applicable only from a date to be notified.
The Guidance Note attached to the JS, TRU letter to the Budget 2012, states:
Activity could be active or passive and would also include forbearance to act. Agreeing to the obligation to refrain from an act or to tolerate an act or a situation has also been specified as a declared service under section 66E of the Act.
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 .
As mentioned earlier, all these complications are future endurance for us, but the CAG is far ahead of the Revenue Department and it has raised an objection that such non-performance is already taxable.
In its latest report on Service Tax, the CAG says,
“M/s ACX, in Delhi service tax Commissionerate, had received payment aggregating to Rs 2.50 Crore from an individual for refraining from participating in various bids during the period 2005-06. By abstaining/refraining from bids on the request of an individual for a consideration, the assessee had indirectly promoted the business of that individual. As such, the service rendered by the assessee was classifiable under the head ‘business auxiliary service' but the assessee had not discharged his service tax liability on the same. Service tax and cess of Rs 25.50 lakh, besides interest of Rs 15.19 lakh and penalty were recoverable.
When we pointed this out (June and November 2008), the Commissionerate stated (November 2010) that a show cause notice demanding service tax including cess aggregating to Rs 25.50 lakh along with interest and penalty had been issued to the assessee.
The Ministry in its reply (December 2011) stated that the matter is under examination”.
Many of us are under the wrong impression that non-performance would be taxable after the Finance Bill is enacted, but CAG has brought it under tax net from 2005. Based on this AG Report, Show Cause Notices will fly around all over the country.