TMI Blog2011 (12) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... the levy of the Service Tax on the services alleged to be received by the petitioner from Software Services LC (SSLC) having its office in USA under the 'Master Services Agreement', and for which the letter dated 18.6.2010 has been sent to the petitioner on the basis of an audit report of the audit inspection, since there has been no adjudication under the Act, we direct that the competent authority under the Finance Act, 1994 to decide the matter in accordance with the law laid down. - WRIT TAX NOS. 1243 and1244 OF 2010 - - - Dated:- 16-12-2011 - Sunil Ambwani and K.N. Pandey, JJ. JUDGMENT 1. We have heard Shri J.K. Mittal and Shri C.K. Rai for the petitioner-company. Shri S.P. Kesarwani, Additional Chief Standing Counsel appears for the State respondents. 2. The petitioner is a Public Limited Company incorporated under the Companies Act, 1956 having its registered office at C-35, Sector-62, Noida, UP. It was earlier known as 'American Devices India Pvt. Ltd', prior to change of its name w.e.f. 11.9.2009. 3. In Writ Petition No. 1243 of 2010, the petitioner has challenged the constitutional validity of Section 66A of Chapter-V of Finance Act, 1994; the Taxation of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 27.2.2010. (b) Section 65 of the Act deals with the definitions and more particularly clause (105) of said section deals with the definitions of taxable services. (c) Section 66 of the Act is the charging section and provides for levy of service tax at the rate of twelve per cent of the value of taxable services. Further, as per Section 95 of the Finance (No. 2) Act, 2004, which has been made effective from 10.9.2004, in addition to the tax chargeable on such taxable services, there are also provisions of levy of an Education Cess at the rate of two per cent of service tax. Further as per the Section 140 of Finance Act, 2007 w.e.f. 12.05.2007, there is provision of levy of secondary and higher education cess at the rate of 1% of service tax. (d) Section 68 of the Act requires that every person providing taxable service shall pay service tax at specified rate. However, sub-section (2) of Section 68 requires that in respect of notified taxable services, the service tax, thereon, shall be paid by such person and in such manner as may be prescribed at specified rate and in such case, all the provisions of the Act, shall apply to such person as if he is the person liable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) in clause (d) of Sub-rule (1) of Rule 2, was substituted consequent to the insertion of Section 66A of the Act. The amended Section 66A clause (d) substituted by notification dated 31.12.2004, and thereafter amended again by notification dated 19.4.2006, of which the constitutional validity is under challenge in the writ petition, reads as follows:- "(d) 'person liable for payment the service tax' means, "(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under Section 66A of the Act, the recipient of such service." 11. The Finance Act, 1994 was amended on 13.5.2005 by clause (a) of Section 88 of the Finance Act, 2005 adding Explanation to clause (105) of Section 65 w.e.f. 16.6.2005. The explanation reads as follows:- "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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the purposes of this section. Explanation 1.- A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country. Explanation 2.- Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted." 14. The Ministry of Finance, Government of India, introduced the Taxation of Service (Provided from outside India and Received in India) Rules, 2006 w.e.f. 19.4.2006 under the newly inserted Section 66A. For the purpose of this case it is useful to reproduce the Rules:- "Taxation of Services (Provided From Outside India and Received in India) Rules, 2006 (Notification No. -11/2006-ST (F. No. B1/4/2006-TRU) dated 19.4.2006 as amended) In exercise of the powers conferred by sections 93 and 94, read with section 66A of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:- 1. Short title and commencement (1) These rules may be called the Taxation of Services (Provided from outside India and Received in India) Rules, 2006. (2) They shall come into force on the date of their publicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of provision of service, through internet or an electronic network including a computer network or any other means, then such taxable service, whether or not performed in India, shall be treated as the taxable service performed in India; (iii) specified in clause (105) of section 65 of the Act, but excluding- (a) sub-clauses (zzzo) and (zzzv); (b) those specified in clause (i) of this rule except when the provision of taxable services specified in clauses (d),(zzzc), (zzzr) and (zzzzm) does not relate to immovable property; and (c) those specified in clause (ii) of this rule, be such services as are received by a recipient located in India for use in relation to business or commerce. Provided that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is received by a recipient located in India, then such taxable service shall be treated as taxable service provided from outside India and received in India subject to the condition that the tangible goods supplied for use are located in India during the period of use of such tangible goods by such recipient. 4. Registration and payment of service tax.- The recipien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Service Tax, Noida dated 18.6.2010 declaring it without any jurisdiction and against the provisions of law, arbitrary and against the principles of natural justice. 19. The petitioner has raised the issue of the constitutional validity of Section 66A of Chapter-V of the Finance Act, 1994 and the Taxation of Services (Provided From Outside India and Received in India) Rules, 2006 (in short the Rules), as well as the instructions dated 30.6.2010. 20. It is submitted by Shri J.K. Mittal appearing for the petitioner that Section 64 of the Finance Act, 1994 specifies that the provisions of service tax are applicable to the whole of India except State of Jammu and Kashmir. The provisions of the Act thus define geographical boundary of operation of the Act. Any act of receiving or rendering of service outside the territory of India is not amenable to the Finance Act, 1994. He relies upon judgments in Haridas Exports v. All India Float Glass Mfrs. Association [2002] 6 SCC 600 in which the Supreme Court applied the "effects doctrine". It was held that Section 2 (o) read with Section 2 (u) and Section 37 gives jurisdiction to the MRTP Commission to pass appropriate orders qua Restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es specified in the notification. The provisions of the Act, therefore, cannot be applied to the territories beyond the territorial jurisdiction of India, and hence no Service Tax can be levied on the services provided outside India by foreign company irrespective of the fact that the company in India takes the services. 24. Shri Mittal submits that the Ministry of Finance, Government of India has issued clarifications from time to time that the services outside the India do not attract Service Tax. The instructions dated 7.10.1998, 'Frequently Asked Questions', issued in October 2003 clearly provided that services outside India do not attract service tax. The instructions dated 16.11.2007 issued by Ministry of Finance also accepts that the incidence of Service Tax is attracted with reference to the place where the service is provided. 25. Shri Mittal submits that the Directorate General of Foreign Trade (DGFT) in its Circular dated 11.4.2008 has clarified that the Service Tax is leviable only on the taxable service provided in India. He submits that unlike the Income Tax Act, 1961, there is no double taxation treaty in Service Tax and therefore, if services rendered by a forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Property based services cover service providers such as architects, interior designers, real estate agents, construction services, mandapwalas etc.. Performance based services are services provided by service providers like stock-brokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents etc.. 20. On the basis of the above discussion, it is clear that service tax is VAT which in turn is both a general tax as well as destination based consumption tax leviable on services provided within the country." 26. Reliance has also been placed by Shri Mittal on Bimal Chandra Banerjee v. State of Madhya Pradesh AIR 1971 SC 517; Agricultural Market Committee v. Shalimar Chemicals Works, 1975 (5) SCC 516; Kunj Biharilal Butail v. State of Himanchal Pradesh, 2003 (3) SCC 40, and Ishikawajma-Harima Heavy Industries Ltd v. Director of Income Tax, Mumbai [2007] 3 SCC 481 to support his submissions. 27. Shri S.P. Kesarwani, Additional Chief Standing Counsel appearing for the Central Excise Department submits that in October, 2009 the audit team detected that during the period of April 2007, to March, 2009 the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue shall undergo modification commensurate with the scale of operations as agreed between the Companies from time to time." 29. Shri Kesarwani submits that the agreement executed in India; the petitioner's business place is at Noida where it is receiving the services of a foreign company and from where it is executing contract with its customers in USA. He refers to paras A, B, C, 1 (7, 8), 2.1, 3.1, 3.2, 3.3.7, 4, 5, 14 of the agreement. The agreement is subject to Indian laws applicable for resolution of any dispute between the company and foreign company; the consideration has to be paid under para-6 in India. The service received by the petitioner from a foreign company is 'business auxiliary service', as defined in Section 65 (19) in India and is liable to tax under Section 65 (105) (zzb) read with Section 66A of the Act. He submits that the reliefs claimed in Writ Tax No. 1244 of 2010, against the letter dated 18.6.2010 directing the petitioner to pay service tax with interest is premature, as the show cause notice under Section 73 of the Act has not been issued so far. 30. Shri Kesarwani submits that as per material which has come in the hands of the department by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "7. Now while considering the constitutional validity of a statute said to be violative of Article 14, it is necessary to bear in mind certain well established principles which have been evolved by the courts as rules of guidance in discharge of its constitutional function of judicial review. The first rule is that there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. This rule is based on the assumption, judicially recognised and accepted, that the legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. The presumption of constitutionality is indeed so strong that in order to sustain it, the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation. 8. Another rule of equal importance is that laws relating to economic activities should be viewed w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by the United States Supreme Court in Secretary of Agriculture v. Central Reig Refining Company 94 Lawyers Edition 381 be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Finance Act, 1994 can be applied to. The charging section remains Section 66, even for the service imported. In other words, the tax collected from the recipient in terms of section 66A, is also tax chargeable under Section 66 of the Finance Act, 1994 and thus there is no mistake in the relevant provision of the CENVAT Credit Rules, 2004 and that credit of tax paid on imported services should be allowed, if they are in the nature of input services. 35. A matter on the demand of service tax under business auxiliary service on the services of overseas commission agents came up for consideration in Commissioner of Central Excise, Ludhiana v. Bhandari Hosiery Exports Ltd. 2010 (18) S.T.R. 713 (P H). In this case the assessees were engaged in the manufacture of hosiery goods and were involved in their export. They availed services of individual overseas commission agents as auxiliary services. A show case notice was issued. It was stated that the assessee was recipient of service of commission agent who is residing outside India. The Adjudicating Authority confirmed the demand. In appeal the Commissioner (Appeals) set aside the demand to the extent, it was beyond the period of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38. In Shrikant Bhalchandra Karulkar v. State of Gujarat, [1994] 5 SCC 459 the Supreme Court held that no doubt in view of the provisions of Art.245 and 246 of the Constitution of India the State legislature has no legislative competence to make laws having extra territorial operation, but so long as law made by State legislature is applicable to the persons residing within its territory and to all things and acts within its territory, it cannot be considered extra-territorial. The doctrine of 'territorial nexus' as evolved by the Supreme Court is well established. If there is a territorial nexus between the persons/ property subject matter of the act in the State seeking to comply with the provisions of the Act, then statute cannot be considered as having extra-territorial operation. In para 7 it is held that the sufficiency of the territorial connection involves consideration of two elements. The connection must be real and not illusory, and the law sought to be imposed under the Act must be relevant to that connection. Same view was taken in the State of Bihar Ors. v. Shankar Wire Products Industries Ors., [1995] Supp 4 SCC 646. The Bihar Weight and Measures (Enforcement) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... global criminal and terror networks, the Supreme Court held that the Parliament is constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any direct or indirect, tangible or intangible impact or the effect or consequence for the territory of India, or any part of India or the interests of the welfare of the well being of or security of inhabitants of India and Indians. The Supreme Court held in para 124 and 126 as follows:- "124. We now turn to answering the two questions that we set out with: (1) Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact (s) on or effect (s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians? The answer to the above would be yes. However, the Parliament may exercise its legislative powers with respect to extraterritorial aspects or causes, - events, things, phenomena (howsoeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, and also with respect to extraterritorial aspects or causes that have an impact on or nexus with India as explained above in the answer to Question 1 above. Such laws would fall within the meaning, purport and ambit of the grant of powers to Parliament to make laws "for the whole or any part of the territory of India", and they may not be invalidated on the ground that they may require extra-territorial operation. Any laws enacted by Parliament with respect to extraterritorial aspects or causes that have no impact on or nexus with India would be ultra-vires, as answered in response to Question 1 above, and would be laws made "for" a foreign territory." 40. The Supreme Court also held in G.V.K. Industries Ltd. case, that Parliament does not have power to legislate for any territory other than territory of India or part of it and such laws would be ultra vires. It follows, therefore, that the Parliament is empowered to make laws with respect to aspects or cause that occur, arise or exist or may be expected to do so within the territory of India, and also with respect to extra-territorial expects or cause that have an impact on or nexus with India. 41. The charge of the Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed share of revenue shall undergo modification commensurate with the scale of operations as agreed between the companies from time to time. Prima facie, on these terms, we find that the taxable services provided from outside India, are received and can be taxed in India under Section 66A (1) (b) of the Act. 42. So far as the argument of double taxation is concerned, it was held by the Supreme Court in Ishikawajma-Harima Heavy Industries Ltd v. Director of Income Tax, Mumbai (supra) that payment by a resident to a non-resident by way of fees for technical services must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. The Supreme Court laid down a test of double taxation namely that the services, which are source of income that is sought to be taxed, has to be rendered in India as well as utilised in India. Where both these conditions are not satisfied, the income is excluded from the ambit of taxation in India. It was further held that only such part of income as is attributable to operations carried out in India, can be taxed in India. For profits to be attributable directly or indirectly, permanent establishment must be involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who has established a business or has a fixed establishment from which the services are provided and are received by a person (recipient), who has his place of business, fixed establishment, permanent address or usual place of residence in India to be taxable services and the Taxation of Services (Provided from Outside India) Rules, 2006 made in exercise of powers conferred by Sections 93 and 94 read with Section 66A of the Finance Act, 1994 notified on 19.4.2006 and amended by notification dated 27.2.2010, does not suffer from vice of unconstitutionality, either on the ground of lack of legislative competence, or on the ground of extra territorial operation of laws. So far as the levy of the Service Tax on the services alleged to be received by the petitioner from Software Services LC (SSLC) having its office in USA under the 'Master Services Agreement', and for which the letter dated 18.6.2010 has been sent to the petitioner on the basis of an audit report of the audit inspection, since there has been no adjudication under the Act, we direct that the competent authority under the Finance Act, 1994 to decide the matter in accordance with the law laid down. 46. The Writ Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
