SERVICES RENDERED FROM OUTSIDE INDIA - PERSON LIABLE

[Dr. Sanjiv Agarwal]

The Finance Act, 2005 had inserted the following explanation to Section 65(105) w.e.f. 16.06.2005-

Explanation - For the removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India such service shall be deemed to be taxable service for the purposes of this clause.

Thus, any taxable service, provided from outside India by a non-Indian became a taxable service in India in the hands of a service receiver as a destination based consumption tax. The following two conditions must be satisfied -

(a)   Service should be provided by a person having a place of residence or place of business outside India and

(b)   Service should be received by a person having a place of residence or place of business within India.

The services rendered by a person outside India to a person who has a place of residence or business in India would be taxable. This would mean that if a service provided by a foreign service provider entirely outside India, the mere fact that the service recipient has a presence in India would make this service liable to tax.

Service tax will not be applicable only in one case where service provider and service receiver both are residents outside India and service is neither rendered or used in India.

Prior to 16.6.2005 when an explanation was added to section 105 creating deeming provision of taxable service in relation to services provided by person from outside India, there was no provision in Chapter V of the Finance Act, 1994 which provided for taxability of services provided by foreign service provider to service receiver in India.

Finance Act, 2006 had inserted a new Section 66A in the Finance Act, 1994 (Chapter V) dealing with statutory provisions of service tax. According to the explanatory notes to the Finance Bill, 2006, Section 66A has been inserted to levy service tax on taxable services provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and received by a person who has his place of business, fixed establishment, permanent address or usual place of residence, in India under reverse charge method.

As a consequence, explanation added at the end of section 65(105) by the Finance Act, 2005 was omitted. The new section paves way to the clear legislative intention of the Central Government on the taxation of taxable services rendered by non-resident persons from outside India (i.e., outside the territorial limits of India) to a person in India.

Thus, Finance Act, 2006 inserted Section 66A to levy service tax under reverse charge method on taxable services provided from outside India to a recipient in India. At the same time, explanation at the end of Sub-section (105) of Section (65) which was inserted in 2005 has been omitted which also provided for the similar provision.

Section 66A applies to specific situation where any taxable service specified in section 65(105) is provided by a person from outside India and received by a person in India and in such situation, section 66 does not apply. In case of deemed import of services, section 66A becomes the charging section instead of section 66. Thus, section 66 and section 66A, both are mutually exclusive.

Section 66A imposes two conditions which needs to be satisfied for taxation of service tax on such imported services -

—    service must be received by a person in India

—    service provider must be situated outside India.

If both the above conditions are fulfilled, then only the question of levy of service tax arises. Import of services not meant for commercial use or business use shall not be taxable.

In  Indian National Ship Owners Association  v Another Union of India[2009 -TMI - 32747 - BOMBAY HIGH COURT], the High Court has held that-

(a)                Notification No 1/2002-ST dated 1.3.2002 does not levy service tax on the service recipient.

(b)               Rule 2(1) (d)(iv) of Service Tax Rules 1994 does not apply to levy of service tax on services rendered outside India .

(c)                 Service recipient can not be made liable to pay service tax under rule 2(1)(d)(iv) unless there is a provision in the Act.

(d)               For services received outside India, rule 2(1)(d)(iv) would not apply as service were received by assessee outside India and not in India.

(e)                W.e.f. 18.4.2006, vide section 66A, a persons resident in India or having business in India has been made liable to service tax as a recipient of service outside India.

(f)                 Members of petitioner association receiving various services outside India from non- residents were not liable to service tax period prior to 18.4.2006.

The high court held that held 'According to scheme of the Finance Act, as it existed before 18^th April, 2006, the charge of service-tax is on the person who is responsible for collecting the service-tax . It is by virtue of the provisions of section 65 the person who provides the service is regarded as the assessee. Now, so far as the Notification No. 1/2002-ST, dated 1^st March, 2002 which is relied on for justifying levy of service-tax from 1^st March, 2002 is concerned,  perusal of that notification whose that by that notification service which is rendered of provided in the continental shelf, exclusive economic zone and territorial waters of India has been made taxable. That notification does not have they effect of levying service tax on the recipients of the service. Therefore, levy of service tax on the members of the petitioners association on the basis of notification dated 1^st March, 2002 is plainly without authority of law'.

The court observed that vide Notification No 1/2002-ST dated 1.3.2002, service which is rendered or provided in the Continental Shelf Exclusive Economic Zone and Territorial Waters of India has been made taxable that notification does not have the effect of levying service tax on the recipients of the service. Therefore, levy of service tax on the members of the petitioners association on the basis of notification dated 1^st March, 2002 is plainly without authority of law.

Where the vessels and ships owned by members of petitioner association received service outside India, court observed tax service tax can not be levied on the basis of rule 2(1)(d)(iv).

So far as explanation to section 65(105) is concerned, which was in force prior to 18.4.2006, it is clear that service provided by a non-resident outside India to a person residing in India has been declared to be taxable service. Therefore, through the service provided to the members of the petitioner association outside India becomes taxable service, the charge of the tax continues to be on the provider of service as per the scheme of the Act, and because of the Explanation also the respondents do not get authority of law to levy a service tax in relation to the service rendered to the vessels and ships of the members of the petitioners association outside India .

Because of the enactment of section 66 A, a person who is resident in India or business in India becomes liable to be levied service tax when he receives service outside India from of section 66 A it is apparent that there was no authority vested by law in the respondents to levy service tax on a person who is resident in India , but who receives service outside India. In that case  till section 66A was enacted a person liable was the one who rendered the service. In other words, it is only after enactment of section 66A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider. Before enactment of section 66A, there was no such provision in the Act and therefore, the respondents had no authority to levy service tax on the members of the petitioners association.

Thus, in the ultimate analysis, court held that assessees, members of Ship owners Association receiving various service outside India from non resident were not liable to service tax for the period form 1^st March, 2002 to 17^th April 2006.