SERVICE TAX LIABILITY OF INDIAN SERVICE RECEIVERS (for services rendered from abroad)

[Dr. Sanjiv Agarwal]

Section 66A of the act read with the Taxation of Services (Provided from Outside India and Received In India) Rules, 2006 (hereinafter referred as Import of Services Rules) provide criteria for taxation of services imported in India. Accordingly, a service shall be taxable under the provisions of Section 66A, if:

(a)    Provider of service is based outside India

(b)   Recipient of service is based in India

(c)    Service qualifies as import under Import Rules

(a)    Provider of service is based outside India: Such service is 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

(b)   Recipient of service is based in India: Such service is received by a person who has his place of business, fixed establishment, permanent address or usual place of residence, in India; and thus for the purpose of determining import scenario, the loacation of service providor and service recipient is the key factor. Relevant terms and expressions usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted. (Explanation to section 66A)

            Bombay High Court in the case of Indian National Ship Owners Association v. Union of India [2009 -TMI - 32013 - HIGH COURT OF BOMBAY] had held that levy of service tax on a person who is resident of India but receives services from outside India prior to insertion of section 66A is not sustainable. In view of section 66A, offshore services cannot be subjected to service tax prior to 18.04.2006. Before enactment of section 66A, there was no authority vested by law in revenue to levy service tax on a person who was resident in India and received services outside India.

            Explanation to section 65(105) was added by Finance Act, 2005. Supreme Court held in Union of India v. Martin Lottery Agencies Ltd. [2009 -TMI - 33336 - SUPREME COURT OF INDIA] that if by reason of an explanation, the taxing net has been widened, it cannot be held to be retrospective in operation. No doubt, the explanation begins with the words, 'for the removal of doubts'. It does not mean that it is conclusive in notice. In law, it is not.

Bombay High Court in Indian National Ship Owners Association v. Union of India [2009 -TMI - 32013 - HIGH COURT OF BOMBAY] held that by explanation to section 65(105) services provided by a non-resident outside India to a person residing in India has been declared to be taxable service. Therefore, though the services provided to the members of the petitioner's ­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 revenue do not get authority of law to levy service tax in relation to the services rendered to the vessels and ships of the members of the petitioners association outside India.

The court observed that it appeared that a similar provision in the rules was made applicable by the Government in relation to the clearing agents by making customers of the clearing agent liable for levy of the service tax. That question had been decided by the Supreme Court in Laghu Udyog Bharati v. Union of India [2005 -TMI - 18 - SUPREME COURT OF INDIA] and it had clearly laid down that the imposition of the service tax is on the persons rendering the services and by making a provision in the Rules, levy of tax cannot be shifted to the recipients of the services and the rule framed which brought about this situation has been declared by the Supreme Court to be invalid The law laid down by the Supreme Court in its judgment in Laghu Udyog Bharati v. Union of India [2005 -TMI - 18 - SUPREME COURT OF INDIA], was squarely applicable to rule 2(1)(d)(iv), which was relied on in the instant case. It appeared that it was first time when the Act was amended and section 66A was inserted by the Finance Act, 2006 with effect from 18-4-2006, the revenue got legal authority to levy service tax on the recipients of the taxable service.

Now, 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 a person who is non­-resident or is from outside India. Before enactment of section 66A, it was apparent that there was no authority vested by law in the revenue to levy service tax on a person who is resident in India, but who receives services outside India. In that case till section 66 was enacted a person liable was the one who rendered the services. 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 revenue had no authority to levy service tax on the members of the ship owner's association.

            In Hindustan Zinc Ltd. v. CCE [2008 -TMI - 30059 - CESTAT-LB], it was held that where taxable service is provided by a non resident or from outside India, who does not have any office in India, recipient of such service could not be held liable for paying service tax prior to 01.01.2005 notwithstanding amendment in rule 2(1)(d) of Service Tax Rules, 1994. It was also held that -

"notwithstanding the fact that consulting engineer service was already a 'taxable service', the mere prescription of recipient of such service as the person liable to pay service tax under Notification No. 12/2002 was not sufficient. Notification No. 12/2002 inserted another sub-clause in clause (d) of rule 2 which is the definition clause of the Rules. The definition clause cannot be read as a substantive provision creating liability much less in a tax statute. The notification / amendment simply enlarged the definition of 'person liable to pay service tax' in relation to 'any taxable service provided by a person who is a non­resident or from outside India and, does not have any office in India' making the recipient of such service liable to pay service tax. It did not specify, and possibly could not have, the particular service or services in relation to which recipient would be liable to pay service tax. This was done by Notification No. 36/2004 which was issued under section 68(2) specifying the taxable services for the purposes of the said sub-section, i.e., sub-section (2) of section 68.

Four services were initially specified in Part A of Notification No. 36/2004, dated 31-12-2004. The service specified in Part B was omnibus, namely, 'any taxable service' meaning thereby all types of taxable services provided by a person who is a non-resident or is from outside India and does not have any office in India. In other words, apart from the four services specifically mentioned as items (i), (ii), (iii) and (iv) in Part A, where 'any' taxable service is provided from outside India, by a non-resident who does not have any office in India, the recipient became liable for paying service tax. It is clear that besides the services specified in Part A for which there may be specific reasons, so far as the service provided from abroad is concerned, the service provider could not be made liable to pay service tax and brought under the net of service tax in the absence of the apparent mechanism to collect and recover tax from them. A different provision therefore, had to be made.

It would appear that the phraseology of rule-2(1)(d)(iv) and Part B of Notification No. 36/2004 is the same except that after referring to the taxable service, rule 2(1)(d)(iv) also mentions the person, i.e., the recipient liable to pay service tax. But it is to be kept in mind that similarity was inevitable because both pertain to the same taxable service.

The 'taxable service' referred to in Part B of Notification No. 36/2004 is part of the 'taxable service' referred to in various sub clauses of clause (48) [now clause (105) of section 65]. It need hardly any explanation that a number of 'taxable services' can be provided inside India as well as from abroad. For example, 'consulting engineer' service itself can be provided both inside and from outside India. Where the service is provided from outside India or by a non­resident who does not have office in India, it is clear that the provider of the service cannot be fastened with the liability, and, therefore, a different provision has to be made with respect to such services. It is to be kept in mind that the levy is on rendering of the taxable service and not on the person. No sooner than the taxable event takes place, tax must be collected and, therefore, provision has to be made to fasten the liability to pay tax. The person liable to pay tax is a component of the tax scheme. Since the liability to pay service tax generally is on the provider of service, where liability is to be fastened on any other person, the service(s) in relation to which liability is to be so fastened, has also to be identified and specified. The services had been specified in the erstwhile sub­section (1A) of section 68 itself, corresponding to present sub-section (2), in which it has now been left to the Central Government to do so by a notification.

Corresponding amendments were made inserting sub-clauses (vi) and (vii) in rule 2(1)(d) with effect from 1-4-2005 and 1-5-2006 which reflect the understanding of the Central Government that making amendment in the Rules or the list of the services under section 68(2) alone is not sufficient, and amendments have to be made in the Rules to make the 'person' liable to pay service tax as well as in the list of taxable services to specify the taxable service(s) in relation to which such person is made liable to pay service tax. A combined reading of Notification No. 12/2002 and Notification No. 36/2004 would show that while the former makes the 'person: i.e., the recipient of taxable service in India provided by a non-resident or from outside India liable to pay service tax - without specifying the taxable service, as such, in relation to which he is so made liable, Notification No. 36/2004 does not specify the person liable to pay service tax; it merely specifies the taxable services for the purpose of section 68(2). Both the notifications, therefore, have to be read as complimentary or supplemental to each other and in the absence of either of them, service tax cannot be collected or recovered (in respect of the specified services)."

It may not be out of place to mention that the explanation was omitted when section 66A was inserted w.e.f. 18.04.2006. Thus, it was a temporary provision intended to make service provided from outside India as a taxable service. [Refer also Aditya Cement v. CCE [2007 -TMI - 1442 - CESTAT,NEW DELHI]; Ispat Industries Ltd. v. CCE [2007 -TMI - 1523 - CESTAT, MUMBAI]; Nestle India Ltd. v. CST [2008 -TMI - 31772 - CESTAT NEW DELHI].

            Thus, the tax liability in case of Indian service recipient can not be held prior to 1.1.2005. The service tax liability will arise only from 1.1.2005 or 18.4.2006 as may be applicable.

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