Importing Service or Litigations?

Importing Service or Litigations?

Prepared By: CA Pradeep Jain,

CA Preeti Parihar and

Sukhvinder Kaur, LLB [FYIC]

Introduction: -

Service Tax is leviable on the taxable services received from outside India by a recipient in India. In such cases, the liability to pay the service tax is on the recipient of service. However, there are a lot of issues plaguing this area. By this article, an effort has been made to sum up all the issues pertaining to import of services under one head.

Charging Section: -

Services received from outside India are liable to service tax by virtue of Section 66A of the Finance Act, 1994. The said section was inserted vide Finance Bill 2006-07. The insertion of section 4 was given assent of the President on 18^th April, 2006. The said section is reproduced hereunder for ready reference: -

Section 66A:- (1) Where any service specified in clause (105) of section 65 is,—

(a) 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) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India,

such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply:

(c)Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:

Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons 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.’

Import of Service Rules: -

The Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 were enacted to give effect to the provisions of Section 66A. These Rules also came into effect from 18^th April, 2006.

Problems arising in taxability of services imported: -

There are many problems being faced in taxing the import of service. Some of the issues are discussed here.

Date of leviability of Service Tax on Import of services: -

There is no consensus with regard to the date from which import of service became taxable. Very first, Notification No. 12/2002-ST dated 01.08.02 which became effective from 16.08.02 brought amendment in the definition of “person liable for paying service tax” in Rule 2 (1) (d) of the Service Tax Rules, 1994. Following clause was added in the definition:-

"(d) Person liable for paying service tax means. –

(iv) in relation to any taxable service provided by a person who is a nonresident or is from outside India, and does not have any office in India, the person receiving taxable service in India

Then, the import of service was notified as taxable service vide Notification No. 36/2004-ST, dated 31.12.04 which came into effect from 01.01.05. The department started contending that the service tax is leviable on import of service as from this date. But there was a strong stand with the assessees that there is no charging section for the same.

Then, Section 66A was inserted in the Chapter V of the Finance Act, 1994 w.e.f. 18-4-2006. As such, it is always contended by the assessees that service tax is leviable as from this date whereas, department is of the view that service tax is leviable w.e.f. 1.1.05. The conflict between department and assessees took the issue to the appellate authorities. A lot of judicial pronouncements were the outcomes of this litigation.

Judicial pronouncements: -

The dispute as to the date of commencement of liability of the recipient of taxable service provided by a non-resident person or from outside India, and does not have office in India, to pay service tax was raised in Foster Wheeler Energy Ltd. vs. Commr. Of C. Ex. & Cus., Vadodara-II [2007 (7) STR 443 (Tri.-Ahmd.)] wherein it was held as follows:-

“4.8 It is further submitted that the services rendered outside India are made liable to the service tax in view of Section 66A which has been inserted in the service tax provisions by the Finance Act, 2006 with effect from 18-4-2006. Therefore, prior to this date, services rendered outside India are not taxable under the provisions of Finance Act, 1994.”

Similar decision was given by single member bench of Tribunal in the case of Aditya Cement v/s CCE, 2007 (218) ELT 0116 (T). Hon’ble Tribunal has held in this case that the service receiver was not liable to pay service tax for the services received prior to 01.01.05. This view was also held by a Division Bench in the case of Ispat Industries Ltd v/s CCE, 2007 [2007 (008) STR 282].

Thereafter, the matter was referred to Larger Bench in the case of Hindustan Zinc Ltd v/s Commissioner of Central Excise, Jaipur [2008 (011) STR 0338 (Tri.-LB)]. The Larger Bench 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 01.01.05 under Notification No. 36/2004, recipient of such service could not be held liable for paying service tax prior to 01.01.05 notwithstanding the amendment in Rule 2 (1) (d) of the Service Tax Rules under Notification No. 12/2004.

In the case of M/s Hetero Drugs Ltd v/s CCE, Hyderabad [2009-TIOL-1596-CESTAT-BANG] it was held that recipient of taxable service from person residing outside India was not liable to tax prior to 01.01.05. This judgment was delivered by relying upon the Larger Bench judgment in Hindustan Zinc Ltd. [2008-TIOL-1149-CESTAT-CED-LB].

The Chennai Tribunal has also held the same view in the case of M/s Hi Tech Arai Ltd v/s CCE, Madurai [2009-TIOL-1581-CESTAT-MAD]. It was held that the demand of service tax was not sustainable for the reason that period of dispute was prior to 01.01.05 during which no service tax was payable by the recipient of the service provided by a person from outside India who did not have any office in India.

Thereafter, Bombay High Court in the case of Indian National Shipowners Association [2008-TIOL-633-HC-MUM-ST] held that the “Recipient of services in India was liable to Service tax from abroad only from 18-4-2006 after enactment of Section 66A”.

The Delhi High Court also held in United Limited v/s CST, Delhi [2009-TIOL-293-HC-DEL-ST] that in view of judgment of the Division Bench of Bombay High Court passed in Indian National Shipowners Association v/s Union of India [2008-TIOL-633-HC-MUM-ST] it stands declared that the Revenue can collect tax only upon being invested with due legal authority; an event which occurred on the insertion of Section 66A in the Finance Act, 1994 w.e.f. 18.04.2006 by virtue of the Finance Act, 2006. This case is squarely covered by the judgment of the High Court in the Indian National Shipowners Association’s case with which this High Court is in respectful agreement.

In the case of L.G. Electronic (P) Ltd v/s Commissioner of Service Tax, Noida [2008 (012) STR 0322 (Tri-Del)] it was held as under: -

Taxable services provided by non-resident foreign service provider from off shore during period prior to 18-4-06. Comprehensive provisions for taxing the taxable service provided by a nonresident/foreign service provider to his client in India came into force w.e.f. 18-4-06. Appellant not liable to pay service tax under Section 66A of Finance Act, 1994 for period prior to 18-4-06. Waiver of pre-deposit and stay on its recovery granted. Appeal of assessee allowed.

Further, in the case of Jet Speed Audio Pvt Ltd v/s CCE, Mumbai-I [2009-TIOL-1429-CESTAT-MUM] it was held as under: -

“ST-service recipient- Assessee receives IPR service from a foreign company- Revenue imposes tax on royalty and levies penalty- held, no power was vested in the Revenue to levy tax on service recipient prior to 18.04.06 when Section 66A was inserted in the Finance Act, 1994 – since the period is prior to 18.04.06, no demand is sustainable and penalty is set aside- Assessee’s appeal allowed: Mumbai CESTAT.”

In the case of M/s Sandvik Asia Ltd v/s CCE, Pune-I [2009-TIOL-1356-CESTAT-MUM] the question raised was whether the service recipient would be liable to pay service tax for the period prior to 18.04.2007 as Section 66A was incorporated in Finance Act, 1994 w.e.f. 18.04.06. It was held that in view of Bombay High Court decision in Indian National Shipowners Association [2008-TIOL-633-HC-MUM-ST], appellant cannot be held liable for payment of Service Tax for the period 01.01.2005 to 17.04.06.

In the case of CCE, Chandigarh v/s Malwa Cotton Spinning Mills Ltd [2009-TOL-185-CESTAT-DEL] the Commissioner (A) had set aside the demand of service tax raised prior to 01.01.05. In appeal, the Tribunal held that in view of insertion of Section 66A of the Finance Act, 1994 w.e.f. 18.04.06 and the Board Circular that the offshore services provided are not taxable prior to 18.04.06. Revenue’s Appeal was allowed.

The above decisions made one thing clear which is in favour of assessees that there is no liability at the end of assessees prior to 18.04.06 when section 66A was inserted.

Payment of Service Tax from Cenvat Credit Account:-

The demand of Service tax was confirmed w.e.f. 18.4.2006 which arose the next issue whether the service recipient can pay service tax on services imported by him from the Cenvat Credit Account. The Revenue insists that the assessee who is the recipient of services should pay the service tax in cash or from PLA as the Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 provides that taxable services are not to be treated as output services. This rule reads as follows: -

“5. Taxable services not to be treated as output services – The taxable services provided from outside India and received in India shall not be treated as output services for the purpose of availing credit of duty of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004.”

The above rule is blindly applied by the revenue and show cause notices are issued to the assessees by saying that rule 5 says that services received from abroad are not to be treated as output services. Whereas, a close perusal of this rule makes it clear that such services are not to be treated as output services for the purpose of taking the Cenvat Credit of input or input services. For the assessees providing taxable services and manufacturing excisable goods who are made liable to pay service tax under section 66A does not fall in this rule 5 as they are taking the Cenvat credit in the capacity of the provider of taxable services or manufacturer of excisable goods. Such assessees always pleaded that they have rightfully availed Cenvat Credit and Rule 3 (4) of the Cenvat Credit Rules, 2004 prescribes that cenvat credit may be utilised for payment of service tax on output service–

(a) any duty of excise on any final product; or

(b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or

(c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or

(d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or

(e) service tax on any output service:

The term ‘Output Service’ is defined in Rule 2(p) of the aforesaid Rules, which is produced as follows:-

“Output service means any taxable service provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, the expression ‘provider’ and ‘provided’ will be construed accordingly.”

The term ‘Provider of taxable service’ is defined in Rule 2(r) of the Cenvat Credit Rules, 2004. The definition is produced as under:-

“Provider of taxable service includes a person liable for paying service tax.”

Person liable for paying service tax is defined in Rule 2(q) of aforesaid Rules, which is produced below:-

“Person liable for paying service tax has the meaning as assigned to it in clause (d) of sub-rule (1) of rule 2 of the Service Tax Rules, 1994.”

And Rule 2(1)(d) of the Service Tax Rules, 1994 says that:-

“Person liable for paying the service tax means,-

(i) ………………………..

(ii) ………………………..

(iii) …………………………

(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;

(v) in relation to taxable service provided by a goods transport agency, ………………………….

(vi) …………………………..

(vii) …………………………..

The above analogy illuminated by the various provisions of Finance Act, 1994, Service Tax Rules, 1994 and the Cenvat Credit rules, 2004 makes it clear that the services received from abroad are deemed as output services for the recipient of such service, as such, the recipient can use the Cenvat Credit for payment of service tax on the same.

Similar analogy was contended by the assessees who were recipient of GTA services and were liable to pay service tax by virtue of provisions of Rule 2(1)(d) of the Service Tax Rules, 1994. As a result of above analogy drawn by the recipient of GTA services, government amended the definition of output service given under Rule 2(p) of Cenvat Credit Rules, 2004 vide notification no. 10/2008-C.E.(N.T.) dated 1.3.2008 and now the term “Output Service” specifically excludes the GTA services. As such, the recipients of GTA services cannot pay the service tax on GTA from Cenvat Credit by taking shed of above analogy. But no such amendment has been done for services received from abroad. This strengthened the assessees stand that one can pay service tax on services received from abroad from Cenvat credit. If intention of government was to deny the same, the similar amendment would have been done in case of taxable services received from abroad.

Recently, in the case of Toyota Kirloskar Motors Pvt. Ltd v/s CCE (LTU), Bangalore [2009-TIOL-1437-CESTAT-BANG] it was held by the Tribunal that service tax received from outside India can be discharged from Cenvat Credit A/c as there was no exclusion provided in the scope of ‘output service’ defined in Rule 2 (p) of Cenvat Credit Rules, 2004 other than GTA prior to 01.03.08. However, this matter was at the stage of pre-deposit and stay and not the final judgment of the Tribunal. Similar decision is given in the case of M/s Anurag Ferro Products Pvt Ltd v/s CCE & CR, BBSR [2009-TIOL-1345-CESTAT-KOL] wherein it is held that the analogy that GTA is deemed as output service for the purpose of paying the service tax from Cenvat Credit holds good prior to 1.3.08 and such, one can utilize the Cenvat Credit for paying service tax on the same. These decisions clearly imply that one can also use this analogy for paying service tax on taxable services received from abroad as there is no specific exclusion in the definition of output service regarding these services.

Availability of Cenvat Credit of Service Tax paid on import of services: -

Another issue attached to the import of services is regarding the availability of Cenvat Credit of service tax paid on import of services.

Rule 3 (1) of the Cenvat Credit Rules, 2004 prescribes certain duties and taxes levied under various provisions of Excise, Customs and Service tax on which a manufacturer or a service provider will be allowed to take Cenvat credit. However, this rule merely says that credit will be allowed of service tax leviable u/s 66 of the Finance Act, 1994. It does not specifically mention that credit of service tax leviable u/s 66A of the Finance Act, 1994 will be allowed.

However, it has been decided by various appellate authorities that credit of service tax paid by the recipient of service u/s 66A of the Finance Act, 1994 will be allowed. It has been decided in the following cases:-

In the case of General Electric International Inc v/s CCE, Delhi [2009-TIOL-42-CESTAT-DEL] the assessee had received consulting service from non-resident but the invoice was raised at offshore address and payment was also made outside India. It was held that since the output services were provided here and input services also received outside India, credit cannot be denied. Appeal was allowed.

Recently, the Board has clarified vide Circular bearing F. No. 354/148/2009-TRU dated 16.07.09 that credit of tax paid on imported services should be allowed if they are in the nature of input services.

The reasoning given for holding this point given was that Section 66A was not a charging section by itself. It only created a legal fiction to deem import of service as provision of service within India so that the provisions of Chapter V of the Finance Act, 1994 can be applied. Section 66 remains the charging section even for import of services.

Another Facet:-

Going beyond all the above discussions, there is another cold war going against the levy under section 66A of the Finance Act, 1994. The levy of Service Tax on import of services is under challenge before the Supreme Court. The Supreme Court of India has issued notice by order dated 04.09.2009 in the matter of Ankit Exim Pvt. Ltd. V. Union of India & Anr in SLP (C) NO. 21190/2009 for challenging the legality and validity of Section 66A of the Finance Act 1994 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

Remember the decision of hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Indus. Ltd. reported at 2007 (6) STR 3 (S.C.) wherein it was held that the services which are rendered and utilized outside India cannot be charged to tax in India. The levy and collection of Service Tax is governed by the Chapter V of the Finance Act, 1994 and Chapter VA of the Finance Act, 2003. Section 64 of this Chapter restricts the applicability of Service Tax to the whole of India except the State of Jammu and Kashmir. As such, the charging Section itself states that this Chapter will not be applicable outside India. Hence the services received or consumed outside India cannot be made taxable in the India. The notice in case of Ankit Exim Pvt. Ltd. has once again brought this decision in limelight.

Conclusion: -

From the above discussion, it is clear that the provisions made in respect of import of services are going under litigation. Since the levy under section 66A is under challenge, all the other issues pertaining to it are also not free from doubts. However, it is to be taken care, that insertion of a new provision effects other provisions in many ways, some predictable and some unpredictable. Well, irrespective of predictability or otherwise, litigation and law are twins and will go along, it is immaterial how perfectly a provision is framed.

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