Introduction
Service tax on services of providing cabs on rent was first made taxable wide an amendment in the Finance Act, 1997 (taxable w.e.f. – 16.07.1997) wherein the service providers who were license holders under the Rent-a-Cab Scheme, 1989 framed by the Central Government were made taxable – practically not many of these service providers were holding such licenses hence the service did not raise much revenue for the Government. Looking at this the government exempted the whole service from tax w.e.f. 28.02.1999. It remained exempted till 1.04.2004 when it was reintroduced dispensing the requirement of holding a license under the Rent-a-Cab Scheme, 1989 thereby throwing the tax net wide open.
Recent case laws have raised major questions on the applicability of this law to a large section of the service providers. This article deals with this very aspect and tries to find answer to the query of many such service providers. Before going into the merits and demerits of the interpretation of this law, let’s see what is the real modus operandi of the majority of the service providers.
Rent a Cab Business Models
Basically there are three service models which are being followed by the industry at large:
1. Providing cars, maxi-cabs and other small to medium vehicles to the customers on a monthly hiring basis – where the driver & fuel is provided by the service provider if asked for otherwise he charges for the vehicle and rest of the expenses thereon are to be borne by the customer himself.
2. The customer gets the vehicle on per kilometer rate basis – where the driver as well as the fuel is provided by the service provider and customer has to pay for as much as he travels subject some minimum charges.
3. The service provider has his car pools at many places – the customer goes there – chooses a car – pays the refundable deposit as well as the per day or per hour rate for the chosen car and drives the car by himself. In this model the customer himself is responsible for driving the vehicle as well as fuel costs have to borne by him. After his use is over, he parks the car at any company designated parking areas and walks away after getting a refund of the deposit paid earlier.
From the above 3 models the first 2 are prevalent in India whereas the third model is yet to start in a major way.
First model is used by the corporates as well as firms who contract vehicles as per their needs on a monthly rental basis whereas the second model is more prevalent in the tourist industry and for individual customers. Lets examine the existing law covering taxation on this industry
Existing Law
Taxable service in relation to renting of cabs has been defined under section 65 (105) (o) of the Act as follows:
“Taxable service means service provided or to be provided to any person, by a rent-a-cab scheme operator in relation to the renting of a cab;”
Main ingredients that come out from the above section to make a transaction taxable are:
a. The service is provided to any person;
b. The service is provided by a rent-a-cab scheme operator
c. The service is provided in relation to renting of cab
Meaning of the above conditions:
1. The service recipient can be ANY PERSON whatsoever.
2. The service provider has to be a rent a scheme operator and section Section 65 (91) of the Act, defines him as :
“rent-a-cab scheme operator” means any person engaged in the business of renting of cabs;”
Therefore any person who in the normal course does a business of renting of cabs will only be taxable under this section and not everybody who provides vehicles on rent.
Service tax on services of providing cabs on rent was first made taxable wide an amendment in the Finance Act, 1997 (taxable w.e.f. – 16.07.1997) wherein the service providers who were license holders under the Rent-a-Cab Scheme, 1989 framed by the Central Government were made taxable – practically not many of these service providers were holding such licenses hence the service did not raise much revenue for the Government. Looking at this the government exempted the whole service from tax w.e.f. 28.02.1999. It remained exempted till 1.04.2004 when it was reintroduced dispensing the requirement of holding a license under the Rent-a-Cab Scheme, 1989 thereby throwing the tax net wide open.
Recent case laws have raised major questions on the applicability of this law to a large section of the service providers. This article deals with this very aspect and tries to find answer to the query of many such service providers. Before going into the merits and demerits of the interpretation of this law, let’s see what is the real modus operandi of the majority of the service providers.
Rent a Cab Business Models
Basically there are three service models which are being followed by the industry at large:
1. Providing cars, maxi-cabs and other small to medium vehicles to the customers on a monthly hiring basis – where the driver & fuel is provided by the service provider if asked for otherwise he charges for the vehicle and rest of the expenses thereon are to be borne by the customer himself.
2. The customer gets the vehicle on per kilometer rate basis – where the driver as well as the fuel is provided by the service provider and customer has to pay for as much as he travels subject some minimum charges.
3. The service provider has his car pools at many places – the customer goes there – chooses a car – pays the refundable deposit as well as the per day or per hour rate for the chosen car and drives the car by himself. In this model the customer himself is responsible for driving the vehicle as well as fuel costs have to borne by him. After his use is over, he parks the car at any company designated parking areas and walks away after getting a refund of the deposit paid earlier.
From the above 3 models the first 2 are prevalent in India whereas the third model is yet to start in a major way.
First model is used by the corporates as well as firms who contract vehicles as per their needs on a monthly rental basis whereas the second model is more prevalent in the tourist industry and for individual customers. Lets examine the existing law covering taxation on this industry
Existing Law
Taxable service in relation to renting of cabs has been defined under section 65 (105) (o) of the Act as follows:
“Taxable service means service provided or to be provided to any person, by a rent-a-cab scheme operator in relation to the renting of a cab;”
Main ingredients that come out from the above section to make a transaction taxable are:
a. The service is provided to any person;
b. The service is provided by a rent-a-cab scheme operator
c. The service is provided in relation to renting of cab
Meaning of the above conditions:
1. The service recipient can be ANY PERSON whatsoever.
2. The service provider has to be a rent a scheme operator and section Section 65 (91) of the Act, defines him as :
“rent-a-cab scheme operator” means any person engaged in the business of renting of cabs;”
Therefore any person who in the normal course does a business of renting of cabs will only be taxable under this section and not everybody who provides vehicles on rent.
3. Third condition says that the service has to be in relation to RENTING of cabs.
This condition is proving to be a major bone of contention for the service tax department whereby the honorable tribunals have interpreted it in way which makes the whole section redundant as far as one chunk of the service providers are concerned.
Fact & Law
As discussed above there are basically 2 models of hiring of small vehicles prevalent in India wherein one is outright renting of cars and the second is piecemeal hiring.
Both the models satisfy the first 2 conditions out of the 3 discussed above. The last condition is where the judiciary has given conflicting views. The definition says that the service must be in relation to RENTING of vehicles.
In the first business model where the vehicle is given on monthly rental basis – it can be said that the car is rented but in the second model where the car is given on kilometer basis the vehicle can at best be termed as hired. Hence the difference is of Renting vs. Hiring.
This condition is proving to be a major bone of contention for the service tax department whereby the honorable tribunals have interpreted it in way which makes the whole section redundant as far as one chunk of the service providers are concerned.
Fact & Law
As discussed above there are basically 2 models of hiring of small vehicles prevalent in India wherein one is outright renting of cars and the second is piecemeal hiring.
Both the models satisfy the first 2 conditions out of the 3 discussed above. The last condition is where the judiciary has given conflicting views. The definition says that the service must be in relation to RENTING of vehicles.
In the first business model where the vehicle is given on monthly rental basis – it can be said that the car is rented but in the second model where the car is given on kilometer basis the vehicle can at best be termed as hired. Hence the difference is of Renting vs. Hiring.
The American Heritage Dictionary defines these terms as under:
Renting: means payment, usually of an amount fixed by contract, made by a tenant at specific intervals in return for the use of a facility, equipment or service provided by another; to grant temporary occupancy of use of (one’s own property or a service) in return for regular payments.
Renting: means payment, usually of an amount fixed by contract, made by a tenant at specific intervals in return for the use of a facility, equipment or service provided by another; to grant temporary occupancy of use of (one’s own property or a service) in return for regular payments.
Hiring: means to grant the services of or temporary use of for a fee.
As can be seen from above definitions that there is a distinct difference between the two words hence the taxability of transaction needs to be understood in the light of these differences.
Similar question was raised in the case of Express Tours & Travels (P.) Ltd. v. CCE, [2005] 1 STT 305 (MUM. - CESTAT) – where the honorable Tribunal opined and I quote,
“I do not see much of a difference in the words Hire and Rent in the context in which they are used. The Rent-a-Cab Scheme would have consistently used the word ‘Rent’, ‘Rental Charges’, etc., instead of ‘hire’, ‘hire charges’ if there is such a big difference between the two expressions. An ‘Yellow & Black’ motor taxi is engaged by a person whereas he hires a tourist taxi much more formally for a longer duration. The Government’s intention is to tax the providers of a service, which involves, hiring/renting of a cab formally for a longer duration.”
It must be said that according to the facts of the case stated above the appellant failed to put across sufficient evidence to prove that it was hiring the vehicles and not renting them hence the tribunal was not in a position to appreciate the difference between the two transactions.
In other cases where enough evidences were put before the honorable Tribunals they gave some contrary views which have confused the issue no bounds.
Judicial views:
One view
1. Shiva Travels v. CCE – Meerut I [2007] 7 STT 75 (NEW DELHI – CESTAT)
The tribunal said that, “if motor cabs are given on rent along with drivers, the nature of service, prima facie, would remain the same as that of rent-a-cab scheme operator."
The Tribunal thus refused to entertain the difference between hiring and renting and considered both the activities as the same which makes all business models taxable under this section. Similar view was taken in the case of Anil Kumar Agnihotri v. Commissioner of Central Excise, Kanpur [2007] 11 STT 59 (NEW DELHI - CESTAT).
The other view
2. Kuldip Singh Gill v. Commissioner of Central Excise [2005] 2 STT 34 (NEW DELHI - CESTAT)
This case has proved to be a landmark where many tribunals have now come across and agreed to the views of the New Delhi CESTAT.
“It is clear from the contract that the Oil Corporation was not renting out any stipulated number of vehicles; but was making payment for operating trips to various places. The vehicle in question continued to be with the operator, including during the time of its operations for IOC. As and when the trips were required to be undertaken, the operator was asked to carry out the same and he was paid per trip depending upon distance, time etc. as per the rate sheet. The important thing to be noticed is that the cabs were not leased out for any interval of time, for use by the Oil Corporation, according to its discretion. That service tax under the heading does not cover all manner of transport or vehicle hire services is clear from the wording of the heading itself. The levy has been defined as “any service provided...... by a rent-a-cab scheme operator in relation to renting of a cab”. In the present case, there was no renting of cabs. Instead, transport service was provided. In view of this, service tax demand on the appellant is not sustainable."
The above view has been followed in the following similar cases
a. Dharmabhakti Travels v. Commissioner of Central Excise, Rajkot [2007] 9 STT 332 (AHD. - CESTAT)
b. R.S. Travels v. Commissioner of Central Excise, Meerut [2008] 15 STT 437 (NEW DELHI - CESTAT)
In this case the tribunal has said that the logic of Express Tours & Travels (P.) Ltd. v. CCE case cannot be accepted in all cases because in that case the appellant had not produced any evidence to suggest that the cars were being actually hired by the customers and not rented.
c. P. Sugumar v. Commissioner of Central Excise, Pondicherry - [2008] 13 STT 72 (CHENNAI - CESTAT) where the tribunal in its order said,
“After going through the records of the case and considering the submissions by both sides, I find that apparently, when the vehicles are not provided to a person on rental basis for any continuous period of time and are only made available for making journeys as and when required, will not come under the ‘rent-a-cab’ scheme. This is also the ratio of the two decisions of the Tribunal cited by the Ld. Consultant. The appellants have made prima facie case against the demand."
Hence the whole premise for taxing of service providers who provide vehicles on kilometer basis and where the driver belongs to them have been declared non taxable by these tribunals across India. This model of business is the most prevalent in India hence these pronouncements would bring a big cheer to these service providers.
Conclusion: The Way forward:
In the Budget 2008 the Finance Minister introduced a new service called the Supply of Tangible Goods whereby he proposed to tax those transaction where rights to use goods were transferred without transferring the effective control and possession. If we again look at the transaction where the vehicle is given to a customer on kilometer basis and assume that the same is not taxable under the Rent-a-Cab services (as the tribunals have suggested) than also from 11.05.2008 the said transaction would become taxable under the new category.
I do accept the principal that what is expressly not taxable under one head cannot purported to be made taxable under other head but the fact remains that if a transaction is being classified as non taxable due to judicial review and on an argument that the earlier section does not in any way cover those kinds of transactions than it would be hard to argue that the principal discussed above has been violated.
Secondly under the Rent-a-Cab scheme service providers enjoy a hefty 60% abatement as per notification no. 1/2006 which would not be available if the same service is made taxable in the new head.
Hence it would be futile for people to now fight for classification from now onwards – but the above service of Supply of Tangible Goods has become taxable only w.e.f. 11.05.2008 hence all service providers who have cases pending at any stage of adjudication can take help of the above cited cases and bring permanent relief for them. The situation will only change if any of the above cases are reversed by a higher court like the High Court or Supreme Court but till then we can take support of the above case laws and find some robust solution to the pending cases.
Nitesh Jain
www.niteshjain.co.in
(Mob.) 9824182629
Similar question was raised in the case of Express Tours & Travels (P.) Ltd. v. CCE, [2005] 1 STT 305 (MUM. - CESTAT) – where the honorable Tribunal opined and I quote,
“I do not see much of a difference in the words Hire and Rent in the context in which they are used. The Rent-a-Cab Scheme would have consistently used the word ‘Rent’, ‘Rental Charges’, etc., instead of ‘hire’, ‘hire charges’ if there is such a big difference between the two expressions. An ‘Yellow & Black’ motor taxi is engaged by a person whereas he hires a tourist taxi much more formally for a longer duration. The Government’s intention is to tax the providers of a service, which involves, hiring/renting of a cab formally for a longer duration.”
It must be said that according to the facts of the case stated above the appellant failed to put across sufficient evidence to prove that it was hiring the vehicles and not renting them hence the tribunal was not in a position to appreciate the difference between the two transactions.
In other cases where enough evidences were put before the honorable Tribunals they gave some contrary views which have confused the issue no bounds.
Judicial views:
One view
1. Shiva Travels v. CCE – Meerut I [2007] 7 STT 75 (NEW DELHI – CESTAT)
The tribunal said that, “if motor cabs are given on rent along with drivers, the nature of service, prima facie, would remain the same as that of rent-a-cab scheme operator."
The Tribunal thus refused to entertain the difference between hiring and renting and considered both the activities as the same which makes all business models taxable under this section. Similar view was taken in the case of Anil Kumar Agnihotri v. Commissioner of Central Excise, Kanpur [2007] 11 STT 59 (NEW DELHI - CESTAT).
The other view
2. Kuldip Singh Gill v. Commissioner of Central Excise [2005] 2 STT 34 (NEW DELHI - CESTAT)
This case has proved to be a landmark where many tribunals have now come across and agreed to the views of the New Delhi CESTAT.
“It is clear from the contract that the Oil Corporation was not renting out any stipulated number of vehicles; but was making payment for operating trips to various places. The vehicle in question continued to be with the operator, including during the time of its operations for IOC. As and when the trips were required to be undertaken, the operator was asked to carry out the same and he was paid per trip depending upon distance, time etc. as per the rate sheet. The important thing to be noticed is that the cabs were not leased out for any interval of time, for use by the Oil Corporation, according to its discretion. That service tax under the heading does not cover all manner of transport or vehicle hire services is clear from the wording of the heading itself. The levy has been defined as “any service provided...... by a rent-a-cab scheme operator in relation to renting of a cab”. In the present case, there was no renting of cabs. Instead, transport service was provided. In view of this, service tax demand on the appellant is not sustainable."
The above view has been followed in the following similar cases
a. Dharmabhakti Travels v. Commissioner of Central Excise, Rajkot [2007] 9 STT 332 (AHD. - CESTAT)
b. R.S. Travels v. Commissioner of Central Excise, Meerut [2008] 15 STT 437 (NEW DELHI - CESTAT)
In this case the tribunal has said that the logic of Express Tours & Travels (P.) Ltd. v. CCE case cannot be accepted in all cases because in that case the appellant had not produced any evidence to suggest that the cars were being actually hired by the customers and not rented.
c. P. Sugumar v. Commissioner of Central Excise, Pondicherry - [2008] 13 STT 72 (CHENNAI - CESTAT) where the tribunal in its order said,
“After going through the records of the case and considering the submissions by both sides, I find that apparently, when the vehicles are not provided to a person on rental basis for any continuous period of time and are only made available for making journeys as and when required, will not come under the ‘rent-a-cab’ scheme. This is also the ratio of the two decisions of the Tribunal cited by the Ld. Consultant. The appellants have made prima facie case against the demand."
Hence the whole premise for taxing of service providers who provide vehicles on kilometer basis and where the driver belongs to them have been declared non taxable by these tribunals across India. This model of business is the most prevalent in India hence these pronouncements would bring a big cheer to these service providers.
Conclusion: The Way forward:
In the Budget 2008 the Finance Minister introduced a new service called the Supply of Tangible Goods whereby he proposed to tax those transaction where rights to use goods were transferred without transferring the effective control and possession. If we again look at the transaction where the vehicle is given to a customer on kilometer basis and assume that the same is not taxable under the Rent-a-Cab services (as the tribunals have suggested) than also from 11.05.2008 the said transaction would become taxable under the new category.
I do accept the principal that what is expressly not taxable under one head cannot purported to be made taxable under other head but the fact remains that if a transaction is being classified as non taxable due to judicial review and on an argument that the earlier section does not in any way cover those kinds of transactions than it would be hard to argue that the principal discussed above has been violated.
Secondly under the Rent-a-Cab scheme service providers enjoy a hefty 60% abatement as per notification no. 1/2006 which would not be available if the same service is made taxable in the new head.
Hence it would be futile for people to now fight for classification from now onwards – but the above service of Supply of Tangible Goods has become taxable only w.e.f. 11.05.2008 hence all service providers who have cases pending at any stage of adjudication can take help of the above cited cases and bring permanent relief for them. The situation will only change if any of the above cases are reversed by a higher court like the High Court or Supreme Court but till then we can take support of the above case laws and find some robust solution to the pending cases.
Nitesh Jain
www.niteshjain.co.in
(Mob.) 9824182629
