PLACE OF PROVISION OF SERVICE

[Dr. Sanjiv Agarwal]

Determination of Place Provision of Service (Section 66C)

Section 66C seeks to empower the Central Government to make rules to determine the place of provision of service having regard to the nature and description of various services.

Section 66C reads as under -

"(1) The Central Government may, having regard to the nature and description of various services, by rules made in this regard, determine the place where such services are provided or deemed to have been provided or agreed to be provided or deemed to have been agreed to be provided.

(2)  Any rule made under sub-section (1) shall not be invalid merely on the ground that either the service provider or the service receiver or both are located at a place being outside the taxable territory".

Accordingly,

• Central Government has framed the rules and notified vide Notification No. 28/2012-ST, dated 20-6-2012 w.e.f. 1-7-2012.
• Such rules shall determine the place of provision of services for levy of service tax.
• Such rules shall determine—

—        Place where services are provided

—        Place where services are deemed to have been provided, or

—        Place where services are agreed to be provided, or

—        Place where services are deemed to have been agreed to be provided

• Rules shall be framed keeping in mind the nature and description of various services.
• It is pre supposed that provision of service (whether in form of actual provision, deemed provision or agreeing to provide) should exist.
• Determination of place shall decide about the jurisdiction and taxability, or otherwise, of the service in question.

Charging Section

According to section 66B, to be a taxable service, an activity or service should be —

• provided or agreed to be provided by a person to another
• in the taxable territory, and
• should not be specified in the negative list.

The phrase "agreed to be provided" has been retained from the definition of taxable service as contained in the existing clause (105) of section 65 of the Act. The implications of this phrase are —

• Services which have only been agreed to be provided but are yet to be provided are taxable
• Receipt of advances for services agreed to be provided become taxable before the actual provision of service
• Advances that are retained by the service provider in the event of cancellation of contract of service by the service receiver become taxable as these represent consideration for a service that was agreed to be provided.

However, it does not mean that the liability to pay service tax on a service would arise the moment it is agreed to be provided without actual provision of service. The point of taxation is determined in terms of the Point of Taxation Rules, 2011. As per these Rules, point of taxation is –

• the time when the invoice for the service provided or agreed to be provided is issued;
• if invoice is not issued within prescribed time period (30 days except for specified financial sector where it is 45 days) of completion of provision of service then the date of completion of service;
• the date of receipt of payment where payment is received before issuance of invoice or completion of service.

Therefore, agreement to provide taxable services will become taxable only on issuance of invoice or date of completion of service if invoice is not issued within prescribed period of completion or on receipt of payment. For specific cases covered under the said Rules, including continuous supply of service, please refer to the Point of Taxation Rules, 2011.

Thus, if the service are provided or to be provided in the taxable territory, tax shall have to be paid. If it is not so, tax will not be attracted. Sub-section (2) provides that place of provisions of service rules shall not become invalid merely because either the service provider or service receiver or both of them are located outside the taxable territory. Thus, even if both are out of the taxable territory, service tax may still be attracted.

Place of supply rules shall, therefore, determine the location where a service shall be deemed to be provided. It is expected that these rules will also provide a possible back drop to initiate an informed debate to assess the issues that may arise in the taxation of inter-State services for the eventual launch of goods and services tax (GST).

Place of Provision of Service Rules, 2012

Place of Provision of Service Rules, 2012 contain 14 rules and shall be in operation w.e.f. 1-7-2012. These rules pertain to following —

1. Title, extent and commencement (w.e.f. 1-7-2012)
   1. Definitions - account, banking company, continuous journey, financial institution, intermediary, leg of journey, location of service provider, location of service receiver, means of transport, non-banking finance company, online information and database access or retrieval services, person liable to pay tax, provided, received telecommunication etc.
   2. Place of provision of service - generally to be the location of service receiver.
   3. Place of provision of performance based services.
   4. Place of provision of service relating to immovable property.
   5. Place of provision of service relating to events.
   6. Place of provision of service provided at more than one location.
   7. Place of provision of services where provider and receiver are located in taxable territory.
   8. Place of provision of specified services.
   9. Place of provision or provisions of goods transportation services.
   10. Place of provision of passenger transportation services.
   11. Place of provision of services provided on board a conveyance.
   12. Power to notify description of services or circumstances for certain purposes.
   13. Order of application of rules.

These rules are primarily meant for persons who deal in cross border services. They will also be equally applicable for those who have operations with suppliers or customers in the State of Jammu and Kashmir.

As a precursor for the eventual roll out of a nation-wide GST, the new rules are also expected to provide a possible backdrop to initiate an honest debate in interested circles so as to fathom all the various issues that may arise in the taxation of inter-State services.

CBEC in its Letter No. 334/1/2012-TRU dated 16.3.2010/Guidance Note explains the basic philosophy of Place of Provision of Services Rules, 2012 as follows—

"The essence of indirect taxation is that a service should be taxed in the jurisdiction of its consumption. This principle is more or less universally applied. In terms of this principle, exports are not charged to tax, as the consumption is elsewhere, and services pay tax on their importation into the taxable territory.

However, this determination is not easy. Services could be provided from one location, delivered to a person located at another and yet be actually consumed at a third location or over a larger geographical territory, falling in more than one taxable jurisdiction. For example a person located in Mumbai may buy a ticket on internet from a service provider located outside India for a journey from Delhi to London. On other occasions the exact location of service recipient itself may not be available e.g. services supplied electronically. As a result it is necessary to lay down rules determining the exact place of provision to capture the place of consumption, while ensuring a certain level of harmonization with international practices in order to avoid both the double taxation as well as double non-taxation of services.

It is also a common practice to largely tax services provided by business to other business entities, based on the location of the customers and other services from business to consumers based on the location of the service provider. Since the determination in terms of above principle is not easy, or sometimes not practicable, nearest proxies are adopted to provide specificity in the interpretation as well as application of the law".

The main rule or the default rule provides that a service shall be deemed to be provided where the receiver is located.

The main rule is applied when none of the other later rules apply (by virtue of rule 14 governing the order of application of rules). In other words, if a service is not covered by an exception under one of the later rules, and is consequently covered under this default rule, then the receiver's location will determine whether the service is leviable to tax in the taxable territory.

The principal effect of the Main Rule is that:—

1. Where the location of receiver of a service is in the taxable territory, such service will be deemed to be provided in the taxable territory and service tax will be payable.
2. However if the receiver is located outside the taxable territory, no service tax will be payable on the said service.

Rule 14 provides that where the provision of a service is, prima facie, determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration. This Rule covers situations where the nature of a service, or the business activities of the service provider, may be such that two or more rules may appear equally applicable.