TMI BlogPlace of Provision of Services.X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of a service will be determined based on the place of its provision . The 'Place of Provision of Services Rules, 2012' will replace the 'Export of Services, Rules, 2005' and 'Taxation of Services (Provided from outside India and received in India) Rules, 2006 . 5.1.2 For whom are these rules meant? 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. Additionally service providers operating within India from multiple locations, without having centralized registration will find them useful in determining the precise taxable jurisdiction applicable to their operations. The rules will be equally relevant for determining services that are wholly consumed within a SEZ, to avail the outright exemption. 5.1.3 What is the basic philosophy of these rules? 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able territory? If yes, he may be liable to pay tax on reverse charge basis. 6. Is the service receiver an individual or government receiving services for a nonbusiness purpose, or a charity receiving services for a charitable activity? If yes, the same is exempted. 7. If not, he is liable to pay tax. 5.2.2 What is taxable territory ? What is its significance? Taxable territory has been defined in sub-section 52 of section 65B . It means the territory to which the provisions of Chapter V of the Finance Act, 1994 apply i.e. whole of India excluding the state of Jammu and Kashmir. Non-taxable territory is defined in sub-section 35 ibid accordingly as the territory other than the taxable territory. India is defined in sub-section 27 of section 65 B , as follows: India means ( a ) the territory of the Union of India as referred to in clauses (2) and (3) of article 1 of the Constitution; ( b ) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976; ( c ) the sea-bed and the subsoil under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceiver, the place relevant for determining location is the place where the service is used or consumed . Flow Diagram F1 at the end of this section illustrates the manner of determination of location. 5.2.5 What is the meaning of business establishment ? 'Business establishment' is the place where the essential decisions concerning the general management of the business are adopted, and where the functions of its central administration are carried out. This could be the head office, or a factory, or a workshop, or shop/ retail outlet. Most significantly, there is only one business establishment that a service provider or receiver can have. 5.2.6 What is the meaning of a fixed establishment ? A fixed establishment is a place (other than the business establishment) which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to provide the services that are to be supplied by it, or to enable it to receive and use the services supplied to it for its own needs. Temporary presence of staff by way of a short visit at a place cannot be called a fixed establishment. Also, the number of sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enant. The property by itself does not create a fixed establishment. If the company sets up an office in India to carry on its business by managing the property, this will create a fixed establishment in India. Illustration 4 A company is incorporated in India, but provides its services entirely from Singapore. The location of this service provider is Singapore, being the place where the establishment most directly concerned with the supply is located. 5.2.8 What does usual place of residence mean? The usual place of residence, in case of a body corporate, has been specified as the place where it is incorporated or otherwise legally constituted. The usual place of residence of an individual is the place (country, state etc) where the individual spends most of his time for the period in question. It is likely to be the place where the individual has set up his home, or where he lives with his family or is in full time employment. Individuals are not treated as belonging in a country if they are short term, transitory visitors (for example if they are visiting as tourists, or to receive medical treatment or for a sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r:- A company ABC provides a service to a receiver PQR, both located in the taxable territory. Since the location of the receiver is in the taxable territory, the service is taxable. Service tax liability will be discharged by ABC, being the service provider and being located in taxable territory. However, if ABC were to supply the same service to a recipient DEF located in non-taxable territory, the provision of such service is not taxable, since the receiver is located outside the taxable territory. If the same service were to be provided to PQR (located in taxable territory) by an overseas provider XYZ (located in non-taxable territory), the service would be taxable, since the recipient is located in the taxable territory. However, since the service provider is located in a nontaxable territory, the tax liability would be discharged by the receiver, under the reverse charge principle (also referred to as tax shift ). 5.3.3 Who is the service receiver? Normally, the person who is legally entitled to receive a service and, therefore, obliged to make payment, is the receiver of a service, whether or not he actually makes the payment or someone else makes the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial and accounting process, and purchasing process. Normally, these systems will provide the required information and audit trail to identify the establishment that uses or consumes a service. It should be noted that in terms of proviso to section 66B , the establishments in a taxable and non-taxable territory are to be treated as distinct persons. Moreover, the definition of location of the receiver clearly states that where the services are used at more than one establishment, whether business or fixed, the establishment most directly concerned with the use of the service will be the location. Thus, the taxing jurisdiction of service, which is provided under a 'global framework agreement' between two multinational companies with the business establishment located outside the taxable territory, but which is used or consumed by a fixed establishment located in the taxable territory, will be the taxable territory. Illustration The following example illustrates the above, by comparing the place of provision of services rendered under a Global Agreement [ A Global Contract or Agreement is between two parent companies for provision of services from one to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled 'Scenario 1' at the end of this section. Scenario 2 [See Flow Diagram F 3 at the end of this section] AAA enters into a Framework Agreement with BBB for provision of IT services for the whole group. The Framework agreement covers the broad contours of supply between the two parties, payment milestones, obligations relating to confidentiality, penalty for default, limitations of liability and warranties etc, which would apply as and when group companies enter into separate agreements, in accordance with the terms envisaged in the framework agreement. BBB-X and BBB-Y could then enter into separate and independent business agreements with AAA-X and AAA-Y, in countries X and Y respectively, for provision of IT services. There are four agreements, but only three transactions involving provision of services, as indicated in the Flow diagram F3- Scenario 2 at the end of this section. 5.3.5 What is the place of provision where the location of receiver is not ascertainable in the ordinary course of business? Generally, in case of a service provided to a person who is in business, the provider of the service will have the location of the recipient's regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch service to a manufacturing firm for a consumer product (say, a new detergent) will not fall in this category, even if the market research firm is given say, 1000 nos. of 1 kilogram packets of the product by the manufacturer, to carry for door-to-door surveys. 5.4.2 What is the implication of the proviso to sub-rule (1)? The proviso to this rule states as follows:- Provided further that where such services are provided from a remote location by way of electronic means, the place of provision shall be the location where goods are situated at the time of provision of service. In the field of information technology, it is not uncommon to provide services in relation to tangible goods located distantly from a remote location. Thus the actual place of performance of the service could be quite different from the actual location of the tangible goods. This proviso requires that the place of provision shall be the actual location of the goods and not the place of performance, which in normal situations is one and the same. 5.4.3 What are the services that are provided to an individual,..., which require the physical presence of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... located. 5.5.1 What is immovable property ? Immovable Property has not been defined in the Finance Act, 1994. However, in terms of section 4 of the General Clauses Act, 1897, the definition of immovable property provided in sub-section 3 (26) of the General Clauses Act will apply, which states as under: 'Immovable Property' shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. It may be noted that the definition is inclusive and thus properties such as buildings and fixed structures on land would be covered by the definition of immovable property. The property must be attached to some part of earth even if underwater. 5.5.2 What are the criteria to determine if a service is 'directly in relation to' immovable property located in taxable territory? Generally, the following criteria will be used to determine if a service is in respect of immovable property located in the taxable territory: ( i ) The service consists of lease, or a right of use, occupation, enjoyment or exploitation of an immovable property; ( ii ) the service is physically per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Packages of property management services which may include rent collection, arranging repairs and the maintenance of financial accounts. ( viii ) The supply of hotel accommodation or warehouse space. 5.5.4 What if a service is not directly related to immovable property? The place of provision of services rule applies only to services which relate directly to specific sites of land or property. In other words, the immovable property must be clearly identifiable to be the one from where, or in respect of which, a service is being provided. Thus, there needs to be a very close link or association between the service and the immovable property. Needless to say, this rule does not apply if a provision of service has only an indirect connection with the immovable property, or if the service is only an incidental component of a more comprehensive supply of services. For example, the services of an architect contracted to design the landscaping of a particular resort hotel in Goa would be land-related. However, if an interior decorator is engaged by a retail chain to design a common decor for all its stores in India, this service would not be land-related. The default rule i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be regarded as a service ancillary to its organization. A service of hiring a specific equipment to enjoy the event at the venue (against a charge that is not included in the price of entry ticket) is an example of a service that is ancillary to admission. 5.6.4 What are event-related services that would be treated as not ancillary to admission to an event? A service of courier agency used for distribution of entry tickets for an event is a service that is not ancillary to admission to the event. 5.7 Rule 7- Part performance of a service at different locations 5.7.1 What does this Rule imply? This Rule covers situations where the actual performance of a service is at more than one location, and occasionally one (or more) such locations may be outside the taxable territory. This Rule states as follows:- Where any service stated in rules 4, 5, or 6 is provided at more than one location, including a location in the taxable territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is provided . The following example illustrates the application of this Rule:- lllustration 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esence of both the service provider and the service receiver in the taxable territory indicates that the place of consumption of the service is in the taxable territory. Services rendered, where both the provider and receiver of the service are located outside the taxable territory, are now covered by the mega exemption. Illustration A helicopter of Pawan Hans Ltd (India based) develops a technical snag in Nepal. Say, engineers are deputed by Hindustan Aeronautics Ltd, Bangalore, to undertake repairs at the site in Nepal. But for this rule, Rule 4, sub-rule (1) would apply in this case, and the place of provision would be Nepal i.e. outside the taxable territory. However, by application of Rule 7, since the service provider, as well as the receiver, are located in the taxable territory, the place of provision of this service will be within the taxable territory. 5.9 Rule 9- Specified services- Place of provision is location of the service provider 5.9.1 What are the specified services where the place of provision is the location of the service provider? Following are the specified services where the place of provision is the loc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isitions and advice on corporate restructuring and strategy; ( vi ) banker to an issue service. In the case of any service which does not qualify as a service provided to an account holder, the place of provision will be determined under the default rule i.e. the Main Rule 3. Thus, it will be the location of the service receiver where it is known (ascertainable in the ordinary course of business), and the location of the service provider otherwise. 5.9.5 What are Online information and database access or retrieval services ? Online information and database access or retrieval services are services in relation to online information and database access or retrieval or both, in electronic form through computer network, in any manner. Thus, these services are essentially delivered over the internet or an electronic network which relies on the internet or similar network for their provision. The other important feature of these services is that they are completely automated, and require minimal human intervention. Examples of such services are:- ( i ) online information generated automatically by software from specific data input by the customer, such as web-ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck to the principal. Separation of value: The value of an intermediary's service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as commission . Identity and title: The service provided by the intermediary on behalf of the principal is clearly identifiable. In accordance with the above guiding principles, services provided by the following persons will qualify as 'intermediary services':- ( i ) Travel Agent (any mode of travel) ( ii ) Tour Operator ( iii ) Commission agent for a service [an agent for buying or selling of goods is excluded] ( iv ) Recovery Agent Even in other cases, wherever a provider of any service acts as an intermediary for another person, as identified by the guiding principles outlined above, this rule will apply. Normally, it is expected that the intermediary or agent would have documentary evidence authorizing him to act on behalf of the provider of the 'main service'. Illustration A freight forwarder a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trailers and railway wagons. The following are not 'means of transport':- ( i ) Racing cars; ( ii ) Containers used to store or carry goods while being transported; ( iii ) Dredgers, or the like. 5.9.8 What if I provide a service of hiring of a fleet of cars to a company on an annual contract? What will be place of provision of my service if my business establishment is located in New Delhi, and the company is located in Faridabad (Haryana)? This Rule covers situations where the hiring is for a period of upto one month. Since hiring period is more than one month, this sub-rule cannot be applied to the situation. The place of provision of your service will be determined in terms of Rule 3 i.e. receiver location, which in this case is Faridabad (Haryana). 5.10 Rule 10- Place of Provision of a service of transportation of goods 5.10.1 What are the services covered under this Rule? Any service of transportation of goods, by any mode of transport (air, vessel, rail or by a goods transportation agency), is covered here. However, transportation of goods by courier or mail is not covered here. 5.10.2 What is the place of provision of a servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd XYZ, the dealer in Jammu is the person liable to pay freight. Here, in terms of amended provisions of rule 2(1)(d), since the person liable to pay freight is located in non-taxable territory, the person liable to pay tax will be ABC. Accordingly, the place of provision of the service of transportation of goods will be the location of ABC i.e. Delhi. 5.11 Rule 11- Passenger Transportation Services 5.11.1 What is the place of provision of passenger transportation services? The place of provision of a passenger transportation service is the place where the passenger embarks on the conveyance for a continuous journey. 5.11.2 What does a continuous journey mean? A continuous journey means a journey for which:- ( i ) a single ticket has been issued for the entire journey; or ( ii ) more than one ticket or invoice has been issued for the journey, by one service provider, or by an agent on behalf of more than one service providers, at the same time, and there is no scheduled stopover in the journey. 5.11.3 What is the meaning of a stopover? Do all stopovers break a continuous journey? Stopover means a place where a passenger can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... More than one ticket for a journey (issued by a single service provider, or by a single agent, for more than one service providers) 1 (a) Delhi-Bangkok-Delhi (b) Bangkok-Bali-Bangkok Delhi is place of provision for journey (a); Bangkok is place of provision for journey (b) Journey (a) is taxable since place of provision is in taxable territory;Journey (b) is not taxable since place of provision is outside taxable territory. 2 (a) Delhi-New York-Delhi (b) New York-Boston- New York Delhi is place of provision for journey (a); New York is place of provision for journey (b) Journey (a) is taxable since place of provision is in taxable territory; Journey (b) is not taxable since place of provision is not in taxable territory. 3 (a) London-Delhi-London (b)Delhi-Chandigarh (c) Chandigarh-Amritsar (d) Amritsar-Delhi London is place of provision for journey (a); Delhi is place of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ticket (No stopover) 1 Dibrugarh-Kolkata-Mumbai Dibrugarh is the place of provision Journey is taxable, but no service tax is payable owing to the exemption. 2 Dibrugarh-Kolkata-Mumbai- Dibrugarh is the place Journey is taxable, but no service tax Kolkata-Dibrugrah of provision is payable owing to the exemption. Here it is relevant to note that the journey is against a single, return ticket. 3 Guwahati-Kolkata-Bangkok- Kolkata-Guwahati Guwahati is the place of provision for the continuous journey Place of provision being in the taxable territory, the service is taxable, but no service tax is payable owing to the exemption and journey is deemed continuous. 4 Kolkata-Guwahati-Kolkata Kolkata is the place of provision for the continuous journey. Place of provision being in the taxable territory, the service i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tainment during the Kolkata-Delhi leg of a Bangkok-Kolkata-Delhi flight. The place of provision of this service will be Bangkok (outside taxable territory, hence not liable to tax). If the above service is provided on a Delhi-Kolkata-Bangkok-Jakarta flight during the Bangkok-Jakarta leg, then the place of provision will be Delhi (in the taxable territory, hence liable to tax). 5.13 Rule 13- Power to notify services or circumstances 5.13.1 What is the implication of this Rule? This Rule states as follows:- In order to prevent double taxation or non-taxation of the provision of a service, or for the uniform application of rules, the Central Government shall have the power to notify any description of service or circumstances in which the place of provision shall be the place of effective use and enjoyment of a service. The rule is an enabling power to correct any injustice being met due to the applicability of rules in a foreign territory in a manner which is inconsistent with these rules leading to double taxation. Due to the cross border nature of many services it is also possible in certain situations to set up businesses in a non-taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 8, since both the provider and the receiver are located in taxable territory, the place of provision would be the location of the service receiver i.e. New Delhi. Place of provision being in the taxable territory, the service would be taxable in India. By application of Rule 15, the later of the Rules i.e. Rule 8 would be applied to determine the place of provision. FLOW DIAGRAM F1 HOW TO DETERMINE LOCATION? FLOW DIAGRAM F 2 PROVISION OF SERVICES UNDER A 'GLOBAL AGREEMENT' - Scenario 1 FLOW DIAGRAM F 3 PROVISION OF SERVICES UNDER 'FRAMEWORK AGREEMENT'- Scenario 2 Agreement 1 is not transactional, has no consideration, and does not create a provision of service. Agreement 1 stipulates the terms and conditions which are activated only when the parties (i.e. group subsidiaries on either side enter into separate and independent business agreements, in accordance with the terms specified in the framework agreement. Under Agreement 2, service 1 is provided by BBB Ltd to AAA Ltd, and the place of provision of this service, under the main rule, is the location of the receiver i.e. within the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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