The Hindu Business Line : How far does the new `for' go

SECTION 65 (19) of the Finance Act, 1944 was amended with effect from September 10, 2004, to, inter alia, bring in `production of goods on behalf of the client' under the service tax levy. Interestingly, this definition was amended with effect from June 16, 2005, by adding the word `for'. And the definition now reads as `production or processing of goods for or on behalf of the client'.

On a plain reading of the definition as it stood from September 10, 2004 to June 15, 2005, it may be noted that any person who `produces goods on behalf of a client' would be liable to pay service tax under the head `business auxiliary service'. The definition also prescribes that if the activity amounts to `manufacture' as per Section 2 (f) of the Central Excise Act, 1944, then the said activity would be exempt.

Meanwhile, the Government, by Service Tax Notification Number 8/2005 dated March 1, 2005, had granted exemption under the `business auxiliary service' category where the job-worked materials are returned to the client and the client uses the same for manufacture of goods on which excise duty is payable.

However, interpretation of the term `on behalf of a client' appearing in the definition for the period from September 10, 2004 to June 15, 2005, has given rise to certain doubts in the minds of trade and industry as well as the Department.

To understand the implications of the term `on behalf of', one must examine the meaning of the term `agent' under the Indian Contract Act, 1872. As per Section 182 of the Act, an `agent' is a person employed to do any act for another or represent another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the `principal.

Thus the relationship of agent and principal in an agency agreement would essentially imply that a third party is involved or present in the whole transaction. Hence, use of the phrase `on behalf of ` in the definition of business auxiliary service would mean that the said taxable service is concerned with agency where the service provider acts as an agent while representing his principal in dealing with third parties.

While it is important to understand the meaning of `on behalf of the client' used in the term `production of goods on behalf of the client', it is equally important to note the manner in which the same term has been used elsewhere in the same definition in Finance Act, 1994.

It is well settled legal position that same words or terms normally bear the same meaning in the same statute. Thus where the legislature uses the same expression in the same statute at two or more places, then the same interpretation should be given to that expression unless the context requires otherwise.

Considering the other case, it may be noted that business auxiliary service also contains another sub-clause which reads as `provision of service on behalf of the client'. It may be noted that provision of service on behalf of the client would attract service tax.

Now assuming that there is no difference between usage of the terms `for' and `on behalf of', the term `provision of service on behalf of the client' would mean that all services rendered by a person would be subject to service tax. This is because any service provider would always render services for his client.

If that is the case and the above statement is true, then it would have been meaningless for the Government to define more than 80 services that would attract service tax. For example, one can conclude that practically all the services would come under the service tax net, since the term `provision of service on behalf of the client' would mean that any services rendered for a client would attract service tax. To illustrate, there would have been no need for the Government to have notified `dredging services' since any person rendering any dredging service would be considered to be rendering services for a client and that would have taken care of the situation. (Dredging services was notified as a taxable service from June 16, 2005).

Also, an important amendment was carried out under `business auxiliary service' from June 16, 2005, by which the Government added the word `for' in the said definition, which at present reads thus: `Production or processing of goods for or on behalf of the client'.

While the Government chose to add the word `for' in `production of goods' category, the word `for' was not added in the definition of `provision of services on behalf of the client'.

The implications of the latter are two-fold:

First, it is clear that the term `provision of service on behalf of the client' would not mean that any or all services rendered for a client would attract service tax.

Second, the terms `for a client' and `on behalf of a client' denote two different meanings altogether.

It is interesting to note that CBEC Circular dated September 17, 2004, issued by the Government for clarifying certain changes brought about by Finance Act, 2004, had dealt with the issue under discussion. Paragraph 18.2 of the said circular, which dealt with the changes in `business auxiliary services', reads thus:

"... Similarly, if a commercial concern produces goods on behalf of the client or provides service on behalf of a client, such activities would come under the scope of this service, unless the activity of service provider amount to manufacture in terms of the central excise law. The aim of all such activities is production of goods or provision of services, the whole or part of which is being carried out by the service provider (i.e., the agent) on behalf of the client. Such activities include procurements, productions or service providing activities done for the client."

The Government had itself used the term `agent' in the above-mentioned circular and clearly explained that `production of goods' and `procurement of services' are on the same footing. Thus, by implication, the Government had indicated that services rendered, namely, production of goods or provision of services, on behalf of a client as an agent alone would attract service tax. It is settled legal position that circulars issued by the department are binding on the Government.

Thus, job work will not attract service tax for the period September 10, 2004 to June 15, 2005, irrespective of whether the process amounts to manufacture or not and so long as the job work was done `for' the client. Also, the amendment, by inserting the word `for' in `production or processing of goods' category, would only have prospective effect from June 16, 2005.

(The author is a Chennai-based advocate)

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