SERVICES RENDERED FROM OUTSIDE INDIA - LIABILITY - WHO AND FROM WHEN

[Dr. Sanjiv Agarwal]

Legislative Backdrop

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, the objective of inserting section 66A was 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.

Person Liable

Section 68 of the Finance Act, 1994 provides for payment of service tax. Accordingly, every person providing taxable service to any person shall pay service tax at the specified rate in prescribed manner. Sub-section (2) provides that Central Government is empowered to notify any taxable service on which service tax shall be paid by such person in prescribed manner as notified and such person shall be the person liable for paying service tax in relation to such service. Notification No 36/2004-ST as amended by Notification No 9/2006-ST dated 19.4.2006 notified that service recipient shall be the person liable for any taxable service provided or to be provided from a country other than India and received in India under section 66A. Rule 2(1)(d) of Service Tax Rules 1994 prescribe person liable for paying service tax. According to clause (iv), taxable service received from a non resident were taxable in India in the hands of the recipient receiving such taxable service in India. W.e.f. 19.4.2006, the recipient of service has been made the person liable in relation to any taxable service provided to be provided by any person from a country other than India and received by any person in India.

Judicial View

InAditya Cement v. CCE Jaipur II (2007 -TMI - 1442 - CESTAT,NEW DELHI),it has been held that rule 2(1)(d)(iv) only defines the person liable to pay service tax and cannot shift the liability on the person other than service provider unless proper notification is issued under section 68(2) of the Finance Act, 1994. In the instant case, rule 2(1)(d)(iv) was examined with reference to Notification No. 36/2004-ST.

In Molex (India) Ltd. v. CCE (Appeals), Bangalore [2008 -TMI - 3423 - CESTAT, BANGALORE], it was held that question of leviability of service tax on the service recipient prior to 1.1.2005 has to be decided by a larger bench in view o f the conflicting decisions on the matter. While in Aditya Cement v. CCE Jaipur II (2007 -TMI - 1442 - CESTAT,NEW DELHI),, it was held that service tax liability on recipient in case of import of service is only w.e.f 1.1.2005 in view of N. No. 36/2004 and that the rules are subservient to the sections and if a section do not provide discharge of service tax liability by recipient of services from non-resident having no office, then it would be futile exercise to rely upon rules to collect the tax. (followed in Ispat Industries Ltd. v. CCE, Raigad [2007 -TMI - 2039 - CESTAT, MUMBAI], in other case of Calvin Wooding Consulting Ltd. v. CCE, Indore [2007 -TMI - 1545 - CESTAT, NEW DELHI], contrary view was taken that the liability to pay service tax for the services received from abroad is on the recipient [Also see Samcor Glass Ltd. v. CCE, Jaipur - I [2007 -TMI - 2444 - CESTAT, NEW DELHI]

In CCE v. Rainbow Denim Ltd [2009 -TMI - 32283 - CESTAT, NEW DELHI], it was held that where service was  provided by a non resident from outside India who does not have any office in India, having been specified as taxable service w.e.f. 1.1.2005 under Notification No 36/2004, receipt of such service could not be held liable for paying service  tax prior to  1.1.2005.

In Bharat Heavy Electrical Ltd v. CCE [2009 -TMI - 32718 - CESTAT, NEW DELHI],it was held that where service is provided by foreign companies who have no office in India, demand of service tax form service recipient is not sustainable for the period prior to 1.1.2005.

In Hindustan Zinc Ltd v CCE, Jaipur [2008 -TMI - 30059 - CESTAT-LB], larger bench observed that levy of service tax is on rendering to taxable service and not on person. Definition clause can not be read as substantive. The manner of collection of tax is not extendable to include person liable to pay service tax. It was held that service recipient of consulting engineering service provided from outside India was not liable to pay service tax prior to 1.1.2005. Since the liability to pay service tax is generally on the provider of service, where liability is to be fastened on any other person, the services in relation to which liability is to be so fastened, has also to be identified and specified. The services were notified w.e.f. 1.1.2005 vide Notification No 36/2004. [Also see Gujarat Narmada Valley Fertilizers Co. Ltd v CCE, 2009 -TMI - 33380 - CESTAT AHMEDABAD]; Ausmelt Ltd v CCE, Jaipur II [2009 -TMI - 33409 - CESTAT NEW DELHI]; Nahar Spinning Mills v CCE Bhopal [2008 -TMI - 31501 - CESTAT NEW DELHI], Eimco Elecon (India) Ltd v CCE & Customs, Vadodara [2009 -TMI - 32885 - CESTAT, AHMEDABAD]. 

Section 66A

The 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.

From When Liable - Judicial View

In Indian National Ship Owners Association  v Another Union of India [2009-TMI-32013-HIGH COURT OF BOMBAY]the  High Court  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  from 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 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).

Because of the enactment of section 66A, 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. 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.

In Malwa Cotton Spinning Mills v CCE [2009 -TMI - 32340 - CESTAT, NEW DELHI] it was held that services rendered by non resident from outside India is not a taxable service for the period prior to insertion of section 66A w.e.f. 18.4.2006.

Conclusion

Based on the statutory provisions and judicial pronouncements, following position emerges -

(i) Levy of service tax is on rendering of taxable service and not on person.

(ii) No service tax is leviable on services received from abroad prior to 1.1.2005.

(iii)   Receipt of taxable services from abroad   from service provides not having office in India is taxable w.e.f. 1.1.2005.

(iv)  Taxable services rendered is India by a service provider from outside India shall be taxed in India under section 66 A w.e.f. 18.4.2006 and service receiver shall be liable to pay service tax under reverse charge method.