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Service tax on services rendered from outside India - Effective only from 18th April-2006. |
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Service tax on services rendered from outside India - Effective only from 18th April-2006. |
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The Finance Act, 2006 inserted a new section 66A w.e.f 18th April 2006, in the Finance Act, 1994 ("Act") 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 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 place of business, fixed establishment, permanent address or usual place of residence, in India under reverse charge method. Earlier, rule 2(1)(d)(iv) of the Service tax Rules, 1994 inserted with effect from 16th August 2002 read as under: "The person liable for paying service tax means..........(iv) - in relation to any services provided by a person who is a non-resident or is from outside India, does not have any office in India, the person receiving taxable service in India". At that time, there was no provisions in the Finance Act, 1994 making the service provided by a person not having any business establishment or usual place of resident in India from off shore taxable at the end of the service receiver in India. Further, the Finance Act, 2005 an explanation was added w.e.f. 16-6-05 to clause 105 of section 65. The said explanation has been reproduced below: "For the removal of doubts it is hereby declared that where any service provided or to be provided by person, who has established a business or have a fixed established 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 purpose of this clause". At the same time Rule 2(1)(d)(iv) of the Service tax Rules, 1994 was also amended so as to align with the explanation to Section 65(105). However, still there was no definition defining as to what constitutes the import of service. It is only by the Finance Act, 2006, that a legal framework was put in place for the extending of provisions of service tax to the import of taxable services. By Finance Act, 2006 the above mentioned explanation to Section 65 (105) was deleted and section 66A containing similar provisions was inserted in the Finance Act, 1994. Simultaneously, Taxation of services (Provided from Outside India and Received in India) Rules 2006, were notified by Notification 11/06-Service tax Dated 19-4-06 which gave comprehensive definition as to what would constitute 'providing of taxable services from outside India and received in India'. Thus the comprehensive provisions for taxing the taxable service provided by non-resident/foreign service provider to his client in India came into force w.e.f. 18-4-06 only. But the department has not accepted the legal fixation and asking for service tax from 16th August, 2002, instead of 18th April, 2006, and finally, this issue has been reached at Supreme court. The Department moved the Supreme Court challenging the Bombay High Court rulling that restrained it from levying service tax from Indian National Shipowners Association for services received abroad between March 2002 and April 2006. And, finally Supreme Court has dismissed the special leave petition SLP file by the central Government in the case of UNION OF INDIA & ORS, vs. INDIAN NATIONAL SHIPOWNERS ASSOCIATION [ 2009 (12) TMI 850 - SUPREME COURT OF INDIA] A decision of the Mumbai High court in Indian National Ship Owners Association vs. Union of India, Central Board of Excise and Customs [2009-TMI-32013-HIGH COURT OF BOMBAY] held that, service tax on services rendered from outside India, valid from 18th April 2006, Provisions of Rule 2(1)(d)(iv) is invalid, Before enactment of Section 66A, there was no authority in revenue to levy service tax on a person who is resident in India, but who receives services outside India. In this judgment, the authorities had required the appellants to pay the service tax on such services, as recipients on and from August 16th 2002, being the date of introduction of Rule 2(1)(d)(iv) of the Service tax rules 1994. There was also an independent challenge to the taxability of such imports with effect from June 16th 2005, being the date of coming into force of the Explanation to section 65(105) of the Act. The appellants argued that Rule 2(1)(d)(iv) was invalid in law since it was contrary to the overall scheme of service taxation as contained in the various Sections to the Act. The Mumbai High court accepted this argument and held that not only was the rule contrary to the provisions of the Act but also that it only required the recipients of services provided in India by non-residents not having place of business in the country to declare and pay tax on such services, as a reverser charge. The Court consequently held that the rule under reference could not at all be pressed into service in order to require service taxes to be paid on services received by the members of the appellants outside India. The appellants thereafter successfully argued that, since the said rule was both invalid in law and was inapplicable to services received outside India, the Explanation inserted to Section 65(105), with regard to various taxable services, could also not have any effect on such services. The appellants argued that the above explanation only stated that the services provided by a person who was a no-resident to a person who was an Indian resident shall be deemed to be a taxable service. The court held that this explanation did not specify that the tax on such deemed taxable services would need to be discharged by the recipients of such services. The Court also held that this explanation did not enable the authorities to levy a tax in relation to services rendered outside India and hence nothing tuned on the explanation at all. A careful reading of the section suggests that such services may not be taxable and that only those services which are provided from outside India by a non-resident and received by a person in India will be treated as import of services and hence charged to the tax. Indeed, an earlier decision of the Delhi High court in Orient Crafts Ltd. vs. Union of India [2006-TMI-643 -HIGH COURT (DELHI)] exactly this. It is therefore likely that decision of a High Court would be required in order to harmonies the two decision in Indian National Shipowners and Orient Crafts Ltd. In the case Hindustan Zinc case - a Larger Bench of the Tribunal headed by the President held that, "the taxable service provided by a non-resident or from outside India, who does not have any office in India, having been specified as 'taxable service' with effect from 1.1.2005, under notification No.36/2004, recipient of such service could not be held liable for paying service tax prior to 1.1.2005 notwithstanding the amendment in rule 2(1)(d) of the Service Tax Rules under notification no. 12/2004." The Department had challenged this, in the Supreme Court and the Supreme Court had dismissed the Government's appeal - [2009-TMI-35043-SUPREME COURT OF INDIA] This, many in the Government, take as a reason to state that the Supreme Court had confirmed that Service Tax on import of services is payable from 1.1.2005 and not 18.4.2006 as held by the Bombay High Court in Indian National Shipowners Association. The Supreme Court had not held that the tax is payable from 1.1.2005, but only dismissed the Revenue appeal against the CESTAT order holding that it was not payable before 1.1.2005. And there is a lot of difference in the two concepts. But, the Government has not satisfied with the dismissal of its appeal by the Supreme Court, and, the Government filed a review petition in the Supreme Court in the Hindustan Zinc case. The Supreme Court found no merit in the prayer for Review and dismissed the Review Petition. - [2009-TMI-35042-SUPREME COURT OF INDIA]. 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 Bharti vs. 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 Bharti vs. 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. It appears that it is first time when the Act was amended and Section 66A was inserted by Finance Act, 2006 w.e.f. 18.4.2006 by that date 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 service receive outside India from person who is non-resident or is from outside India. The following judicial views, which held that service tax on services rendered from outside India, liability would be only with effect from 18th April 2006, when section 66A was introduced. High court In case of UNITECH LTD. Versus CST, DELHI [2009-TMI-34578 - DELHI HIGH COURT] held that service tax on services received from abroad, no tax prior to 18th April, 2006. In another case between A C NEALSEN ORG-MARG PVT LTD. & ANR vs. UNION OF INDIA & OTHERS the BOMBAY High Court is held that, "when the High Court lays down the law that law is binding on all Tribunals and Authorities functioning within the jurisdiction of the Court: Considering the judgment of the Court in Indian National Shipowners Association v. Union of India, - [2009-TMI-32013-HIGH COURT OF BOMBAY] , the Tribunal has misdirected itself in law in not granting waiver insofar as demand of service tax with interest payable thereon is concerned: Once this Court lays down the law that the recipient of the service is not liable for paying service tax, that law is binding on all Tribunals and Authorities functioning within the jurisdiction of this Court." CESTATE - Tribunal FOSTER WHEELER ENERGY LTD. v. CCE, VADODARA-II [2007-TMI-1457-CESTATE AHMEDABAD] SHARADHA TERRY PRODUCTS LTD. Versus CCE, SALEM [2009 -TMI - 34218 - CESTAT, CHENNAI] ACTIVE INTERNATIONAL Versus COMMISSIONER OF C. EX., JALANDHAR [2007 -TMI - 2425 - CESTAT, NEW DELHI] R. N. OSWAL HOSIERY FACTORY Versus COMMR. OF C. EX., LUDHIANA [2008 -TMI - 30524 - CESTAT NEW DELHI] M/s Flex Industries Limited Versus C.C.E., Noida [2009 -TMI - 32261 - CESTAT NEW DELHI] C.C.E., Chandigarh Versus M/s Rana Polycot Ltd. [2009 -TMI - 32337 - CESTAT, NEW DELHI] MALWA COTTON SPINNING MILLS vs. CCE [2008-TMI-4028-CESTAT, NEW DELHI] HINDUSTAN MOTORS LTD. vs. CCE, INDORE [2009-TMI-34566-NEW DELHI] For the removal of doubts, the important point is that the Supreme Court now settled the issue of taxation of import of services in India and chargeble to the service tax from 18th April 2006 only, and not before. Now, it is hoped that this decision is accepted by the department and not contested further.
By: Vijay Chitte - December 21, 2009
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