By Dipa Devani
The term ‘service’ is defined under Section 65(44) of the Finance Act,
1994 (“the Finance Act”) as under:
Service means any activity carried out by a person
for another for consideration, and includes a declared service, but shall not
(a) An activity
which constitute merely-
(i) A transfer of
title in goods or immovable property, by way of sale, gift or in any other
Under Section 66B of the Finance Act, service tax shall be levied on the
value of all services, other than those service specified in the negative list.
Negative list denotes the list of services on which no service tax is payable
under Section 66B of the Finance Act, 1994. As per Section 66D (e), trading of
goods is a service specified under the negative list. Accordingly, on the
activity of trading of goods, no service tax is payable.
trading of goods is not specified under the negative list then?
Section 66B provides that service tax is leviable on all ‘services’
other than the services specified under the negative list. Therefore, for being
exigible to service tax an activity needs to qualify as a service first. The
term ‘service’ is defined under Section 65B (44) which specifically excludes an
activity of mere transfer of title in goods by way of sale. Thus, the activity
of trading which is merely buying and selling of the goods is not a service.
Hence, the question of service tax levy on the same does not arise.
Accordingly, even if trading activity is not specified under the negative
list of services, it is not liable to service tax, as it is not a service.
Further, negative list of services comprises services but an activity of
trading of goods is not a service, therefore it cannot be specified under the
negative list of services. Therefore, it is worth pondering as to why the
activity of trading, which is not a service, is provided under the negative
list. The present article aims to
highlight real intention behind specifying trading of goods under the negative
list of services. To comprehend the
actual intention, it is necessary to refer to the treatment given to trading of
goods under the old regime of service tax.
under the old regime
With effect from 1-4-2011, activity of trading of goods was included
under the definition of ‘exempted service’ under Rule 2(e) of the Cenvat Credit
Rules, 2004 (hereinafter referred as ‘Rules’):
“exempted service” means taxable services which are exempt from the whole of
the service tax leviable thereon, and includes...................
For the removal of doubts, it is hereby clarified that “exempted services”
This amendment was carried out specifically to overcome the judgment of
CESTAT, Ahmedabad in the case of Orion Appliances Ltd., reported at 2010 (9)
STR 205, wherein the department had asked the asssessee to do proportionate
reversal of credit availed on common input service used for trading activity
and for providing taxable service. The Tribunal held that trading activity was
covered under sales tax law and cannot be called as a service. Therefore,
provision of Rule 6 (3) would not be applicable to an assessee engaged in
providing taxable service and trading activity.
Since, trading was not considered as an exempted service, some of the
manufacturers and service providers were taking advantage of the same and
taking Cenvat credit of service tax paid on input service used in trading
activity without any restriction.
Therefore, to overcome this apparent lacuna in the provisions of Cenvat
Credit Rules, 2004, the definition of the exempted service was amended and by
specifically bringing trading activities within the ambit of exempted service,
the provisions of Rule 6 of the Cenvat Credit Rules were made applicable to the
manufacturer or service provider undertaking trading activities apart from
manufacturing dutiable goods or providing taxable service i.e., a person
carrying on manufacturing and trading activity is obligated to reverse the
proportionate Cenvat credit availed in respect of trading activity.
negative list regime
Now, since trading of goods has been specified under the negative list of
services, it is a service which is not liable to service tax under Section 66B
of the Finance Act. Hence, it would qualify as an exempted service.
Consequently, under the provisions of Rule 6 of the Cenvat Credit Rules, 2004,
obligation to reverse proportionate Cenvat credit availed in respect of trading
activity would arise. Thus, the treatment of trading activity under the old and
new regime of service tax is unaffected as far as Cenvat credit is concerned.
However, here it is difficult to understand as to how an activity of
trading of goods, which is specifically excluded from the definition of the
service, could be included under the negative list of services by considering
it as a service. The activity of the trading of goods is excluded from the
scope of the service because the Constitution of India authorizes levy of sales
tax on sales and purchases of the goods and service tax on the rendition of
service. The distinction between the sale and purchase of goods and act of
rendition of service is clearly brought out for the purpose of payment of tax.
It is true that the legislature has wide power to create a legal fiction
for the purpose of assuming existence of a fact which does not really exist.
However deeming trading of goods as exempted service by including the same
under the negative list of service does not seem to be in accordance with the
principles of the Constitution of India.
Further, recently the Madras High Court in the case, FL Smidth P Ltd.
reported at 2014-TIOL-2186-HC-MAD-CX dealt with the issue, whether entire
Cenvat credit of service tax on service used partly for manufacturing and
partly for trading was available for the period prior to 1-4-2011. In this case
the appellants used service of commission agent commonly for manufactured goods
and traded goods and availed full credit of the same. The department disallowed
Cenvat credit relating to trading activity. The order was upheld by the
Tribunal against which appeal was by the assessee before the Madras High Court.
The High Court held that credit to the extent used for manufactured goods would
only be available and credit to the extent used for traded goods was not
In arriving at the above conclusion, the High Court relied on Rule 2(l)
of the Cenvat Credit Rules, 2004 (“Credit Rules”) which defines input service
as services which are used by the manufacturer directly or indirectly in
relation to the manufacturing of final product and clearance of final product
from the place of removal. As this
definition did not cover services used in relation to trading of goods, the
High Court held that credit of services used in relation to trading was not
In this decision, the High Court has rightly decided that the Cenvat
credit of input service attributable to trading is not available. However, the
issue as to whether partial reversal of Cenvat credit can be demanded on the
common input service used for trading and taxable output service and whether
value of trading turnover can be taken to be the margin 10% of cost of purchase
as is presently taken under Rule 6 of Credit Rules still remain undecided.
Thus, by specifying the activity of trading of goods under the negative
list of services, it becomes an ‘exempted service’. However, an activity of
trading of goods, which constitutes merely a transfer of title in goods by way
of sale, is specifically excluded from the definition of service, thus the
question of considering it as exempted service raises more questions. It is a
moot point whether the provisions of Rule 6 of the Cenvat Credit Rules, 2004,
would be applicable to those cases where input services are commonly used for
trading activity and manufacturing of dutiable goods or providing output
services and whether proportionate reversal of Cenvat credit would be required.
[The author is a Senior Associate, Lakshmikumaran
& Sridharan, Ahmedabad