MARCH 15, 2015

By Sushma Prasad & Jagannadh Grandhi

AS e-commerce business in India is advancing, the present Finance Bill, 2015 has sought levy of service tax on e-commerce transactions under aggregator model. Accordingly, the definition of aggregator is defined under Rule 2(1) (aa) in Service Tax Rules, 1994 (Rules) to mean a person, who owns and manages a web based software application, and by means of the application and a communication device, enables a potential customer to connect with the persons providing service of a particular kind under the brand name or trade name of the aggregator. The term ‘brand name or trade name' has also been accordingly defined under Rule 2 (1) (bca) of the Rules.

This change has been brought into with immediate effect i.e., w.e.f 1.3.2015. Hence, any e-commerce transaction under aggregator model is now taxable. The liability to discharge service tax is on the aggregator under reverse charge. Accordingly, suitable amendment is also brought in Notification No. 30/2012-ST (Reverse Charge Notification) to include aggregators as the person liable to discharge service tax. Further, Rule 2 (1) (d) of the Rules is also being amended and sub-clause (AAA) is being inserted describing the person liable for payment of service tax:

- If the aggregator is located in India, then such aggregator is liable.

- If the aggregator does not have physical presence in the taxable territory, then the person representing the aggregator is liable.

- If the aggregator does not either have a physical presence or representative in the taxable territory then the aggregator shall appoint a person for the purpose of paying service tax.

It appears from the above that the intention of the Government is to impose service tax on all aggregators whether located in the taxable territory or not. This would provide a level playing field for all transactions under aggregator model. Though it is understood that the present Finance Bill has brought in some clarity on e-commerce transactions under aggregator model, there are certain problems peculiar to rent-a-cab industry which demands some clarity. This Article shall therefore, analyze the various model prevalent in the industry and its implications considering the present amendment. As is evident from the nature of transactions there are 3 parties involved under an aggregator model:

- The Aggregator;

- Service Provider using the brand name or trade name of aggregator; and

- Customer

Before analyzing the service tax implications on these transactions, it is relevant to note that as per Reverse Charge Notification, reverse charge is applicable in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers if service provider is individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons and customer is a business entity registered as body corporate.

The consideration flows in this business can be of two types:

However, the flow of consideration is not the test for determining the service tax on these transactions. The contractual terms between the parties (Aggregator, Cab driver) determine the service tax liability. We will analyze the service tax implication under different models.

Model I

In case where Aggregator is acting as rent-a-cab service provider and for this engages independent cab driver (owning the cab) for rendering the service.

Implications

- Rent-a-cab service is rendered by the aggregator and is liable to discharge service tax on this service. However, in case where Aggregator is individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons and customer is a business entity registered as body corporate then the customer is liable to discharge the service tax under reverse charge.

- In respect of the services provided by cab driver, by virtue of the present amendment made in the present Finance Bill, the aggregator shall also be liable to discharge service tax under reverse charge on Rs. 90/- received by the cab driver. The service tax paid on Rs. 90/- may become additional cost for the transportation services if the Aggregator is not entitled for the Cenvat credit of the same.

- Under this model, dispute may also arise as to whether the transaction between aggregator and cab driver is one of transfer of right to use goods (TRUG) or is it a service transaction as the control over the cab is with the aggregator. It is quite likely that the service tax department shall treat this transaction as a service and VAT Department as TRUG as deemed sale and seek to levy VAT. In any case, simultaneous levy of both service tax and VAT on the very same transaction is not new for the assesses!

Model II

Under this model, aggregator acts as an agent for procuring business for cab driver and letting cab driver to use its brand name/ trade name. Cab driver is rendering rent-a-cab service to the customers.

Implications

- Aggregator is liable to service tax on Rs. 10/- received for its services.

- By virtue of the amendment made in the present Finance Bill, the aggregator shall also be liable to discharge service tax under reverse charge on Rs. 90/- received by the cab driver. The service tax paid by Aggregator would become cost, and in turn would increase the cost of transportation.

- The relevant point to be noted here is that Rent-a-cab service is rendered by the cab driver who may be an individual (generally). If the cab driver is an individual and customer is a business entity registered as body corporate, reverse charge provisions would apply and the customer would be liable to discharge service tax on the same Rs. 90/-.

- In effect, on the very same transaction and value of services, both the aggregator as well as the actual service provider would be liable to discharge service tax under reverse charge. Accordingly, effective from 01.03.2015 there is a simultaneous levy of service tax on same value by two different taxable persons. The question which remains unanswered is can there be simultaneous levy of service tax on the very same value of services by two different taxable persons. This issue demands some clarity.

Column 4 of the Reverse Charge Notification has also been suitably amended to include "Percentage of service tax payable by any person liable for paying service tax other than the service provider." It appears that this amendment has been brought specifically to cover aggregators under reverse charge mechanism. However, since the introduction of levy of service tax on aggregators, there are lot of issues which needs to be clarified particularly for the rent-a-cab industry.

Also, it is noteworthy that for the first time under the Finance Act, apart from the service provider and service receiver, any person is also made liable for payment of service tax. Is it therefore, the intention of the Government to impose service tax on any person not associated either with the provision or receipt of service.

[The authors are associated with Lakshmi Kumaran & Sridharan, Hyderabad and the views expressed are personal.]