Pradeep Jain - Chartered Accountant

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Introduction: -

The service tax on import of services is long dispute between assessee and department. We have also written an article on the same. The date from which the liability to pay the service tax was affixed on the service recipient who is residing in India receiving service from a non-resident or a person residing out side India – was disputed. The Revenue was contending that the date was 01.03.02 when Rule 2 (1) (d) (iv) was inserted. Certain decisions of the Tribunal said that it is applicable from 01.01.2005 while others said that the date would be 18.04.06 when Section 66A of the Finance Act, 1994 was enacted. In the case under study, this controversy was settled by the High Court of Bombay.

Relevant Legal Provisions: -

Explanation to Section 65(105) of the Finance Act, 1994: -

"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 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 purposes of this clause;";

Section 66 of the Finance Act, 1994: - Charge of service tax.

(1) There shall be levied a tax (hereinafter referred to as the service tax) at the rate of ten percent of the value of taxable services referred to in sub-clauses (a), (d), (e), (f), (g,) (h), (i), (j), (k), (l), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zh), (zi), (zj), (zk), (zl), (zm), (zn), (zo), (zq), (zr), (zs), (zt), (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk), (zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu), (zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb), (zzzc), (zzzd), (zzze), (zzzf), (zzzg,) (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm), (zzzn), (zzzo), (zzzp), (zzzq), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw), (zzzx), (zzzy), (zzzz), (zzzza), (zzzzb), (zzzzc) (zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi) and (zzzzj) of clause (105) of section 65 and collected in such manner as may be prescribed.

Section 66A of the Finance Act, 1994:- Charge of Service Tax on services received from outside India

(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.’;

Subsection 2 of Section 68 of the Finance Act, 1994: Payment of service tax

(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994: -

(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;

Indian National Shipowners Association v/s Union of India & Ors

[2008-TIOL-633-HC-MUM-ST]

Brief Facts of the Case: -

- Petitioner No. 1 - Association is a not for profit company whose members are owners of Indian Flag Vessels.

- Demand of service tax has been raised by the Department from the member-ship owners for services which are rendered and/or performed outside India by non resident service providers from 01.03.2002 onwards.

- The Petitioners have challenged the levy of service tax from the period 01.03.2002 till 18.04.06 when Section 66A came into force.

Petitioner’s Contentions: -

Ø The petitioners that the demand for service tax on services provided beyond the territorial waters of India was raised after the issuance of Notification No. 01/2002-ST dated 01.03.2002 by which the provisions of Chapter V of the Finance Act, 1994 were extended to Continental Shelf and Exclusive Economic Zone of India.

It is further submitted that after issuance of another Notification No. 36/2004-ST, dated 31.12.04, the demand for service tax was raised from member-shipowners in relation to the services received by them to their vessels and ships outside of India on the basis of this notification.

Ø The petitioner submits that provision of Rule 2 (d) (iv) introduced on 16.06.2000 is invalid as it is contrary to the scheme of the Act.

Ø It was submitted that under the Explanation added to Section 65 (105) on 16.06.2005, services provided by a person who does not have permanent residence in India to a person having present permanent residence in India is deemed to be taxable service. It is submitted that under the said explanation service tax cannot be levied.

Ø The petitioners submit that it is only from 18.04.06 that a substitute provision was made for levy of service tax from a person who received service outside India. Thus, before 18.04.06 no service tax could have been levied on member-shipowners whose vessels and ships receive service outside India. It is submitted that the respondent has not given any justification in their written submission for levying of service tax from the members from 01.03.2002.

Ø Reliance is placed on the judgment in Laghu Udyog Bharati v/s Union of India [1999 (112) ELT 365 (SC)] and the judgment in Gujarat Ambuja Cements Ltd v/s Union of India [2005 (182) ELT 33 (SC)].

Revenue’s Contentions: -

Ø The Respondent have placed reliance on provisions of Rule 2 (1) (d) (iv) of the Rules to claim that in view of those Rules service tax was leviable. It is submitted that with the introduction of clause (iv) in Rule 2 (1) (d) a statutory effect w.e.f. 16.08.2002 had already been created that every service receiver in India became liable to pay service tax in relation any taxable service provided by non-resident, who did not have office in India.

Ø Revenue contended that the statutory effect has to be read harmoniously as if complementing the provisions of Section 68 (2) as it existed prior to issue of Notification No. 63/2004-ST rather than negating its existence or challenging its vires since the date of its incorporation i.e. 01.08.02. The statutory effect created vide Rule 2 (1) (d) (iv) cannot be reduced by reference to a subsequently issued notification repeating the contents of the said Rule.

Ø It is further submitted that in respect of the recipient of services who have been made liable to pay service tax on services received from foreign based persons, there is no denying the fact that the recipients of these services are the ultimate beneficiaries of the services rendered to them. Moreover, the recipient of service has to bear the ultimate burden of tax in case of indirect tax.

Ø Reliance is placed on the judgments in Laghu Udyog Bharati v/s Union of India [1999 (112) ELT 365 (SC)] and Gujarat Ambuja Cements Ltd v/s Union of India [2005 (182) ELT 33 (SC)].

Question for Consideration: -

The question for consideration before the Hon’ble High Court of Bombay was that: -

Whether the service tax is leviable on the services received by the member-ship owners in India from outside India from 18.04.06 when Section 66A was introduced or from 01.03.02 when Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994 was inserted.

Order of the High Court: -

The Hon’ble High Court of Bombay held as under: -

v The High Court considered the provisions of Section 65(105), Section 66 and Section 68 of the Finance Act, 1994 and held that it is clear that according to scheme of the Finance Act, 1994 as it existed before 18.04.06, the charge of service tax is on the person who is responsible for collecting the service tax. It is by virtue of the provisions of Section 65 the person who provides the service is regarded as the assessee.

v The High Court perused the Notification dated 01.03.02 relied upon by the Revenue and held that the notification does not have the effect of levying service tax on the recipients of the service. Therefore, levy of service tax on the member-shipowners on the basis of the said Notification is plainly without authority of laws.

v With regard to Rule 2(1)(d)(iv) relied upon by the Revenue, the High Court held that the perusal of said Rule shows that by that provision a person liable for paying the service tax was defined to mean in relation to any taxable service provided by a person who is non-resident or is from outside India to a person receiving taxable service in India. Apart from the fact that this rule is contrary to the provisions of Section 68 and other provisions of the Act, under this provision the recipient of the service became liable for paying the service tax provided the service was received in India.

v The High Court held that the petitioner’s case is in relation to the service received by the vessels and ship owned by the member-shipowners outside India. Therefore, it cannot be said that on the basis of Rule 2 (1) (d) (iv) service tax can be levied on the member-shipowners. It is to be seen that Section 64 gives power to the Central Govt to make Rules for carrying out the provisions of the Chapter. The chapter relates to taxing the services which are provided, the taxing on the value of the service and it is only the person who is providing the service can be regarded as an assessee. The rules, therefore, cannot be so framed as not to carry the purpose of the chapter and cannot be conflicted with the provisions in Chapter V of the Act. In other words, as the Act makes the person who is providing services liable, the provisions in the Rules, cannot be made which makes the recipient of the service liable. Thus, the provisions of Rule 2 (1) (d) (iv) are invalid.

v The High Court held that the notification dated 31.12.04 relied upon by the Revenue notifies any taxable service provided by a person who is a non-resident or is outside India. The High Court further held that if Rule 2 (d) (iv) is taken to be rule framed pursuant to this provision, then a person who received taxable service in India from a non-resident or is a person outside India, becomes taxable and not service rendered outside India by a person who is non-resident or is from outside India. Therefore, levy of service tax from the members-shipowners from 01.02.05 cannot be justified.

v The High Court further held that by the explanation added to Section 65(105), the services provided by a non-resident outside India to a person residing in India has been declared to be taxable service. Therefore, though the service provided to the member-shipowners outside India becomes taxable service, the liability to pay the service tax continues to be on the service provider as per the Scheme of the Act. By virtue of the Explanation also, the Revenue does not get authority of law to levy service tax in relation to the service rendered to the vessels and ship of member-shipowners.

v The High Court further held that in the case of Laghu Udyog Bharati’s case, the Apex Court has 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 service recipients and the Rule framed which brought this situation has been declared to be invalid.

The law laid down in this judgment is clearly applicable to Rule 2 (1) (d)(iv) relied upon by the Revenue.

v The High Court further observed that the legal authority to levy service tax on service recipient was given to the Revenue for the first time by the enactment of Section 66A. Before the enactment of Section 66A, there was no authority vested by law in the Revenue to levy service tax on person residing in India, but who is receiving service from outside India. Thus, till Section 66A was enacted, a person liable was the person providing the service.

v Thus, The High Court held that only after enactment of Section 66A the taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. Accordingly, respondents were restrained from levying service tax from the member-shipowners for the period from 01.03.02 till 17.04.06 in relation to services received outside India by foreign service providers.

Decision of the High Court: -

Petition allowed.

Comments & Conclusion: -

The High Court rightfully held that the charging section for levying service tax on Indian service recipients i.e. Section 66A was enacted from 18.04.06 and service tax on them could not be levied before 18.04.06.

The Revenue has to have the legal authority to charge and collect service tax from the assessee. And this legal authority was vested in them only on 18.04.06. Therefore, they were not justified to demand service tax from the assessee for the period 01.03.2002 onwards.

The revenue went in appeal before the Apex Court but the Highest Court of India has dismissed the appeal. Thus, it has become final. Now, there is no dispute about the charging of service tax on import of services. It will not be leviable from 01.04.2002 or 01.01.2005 but it will be effective from 18.04.2006. Whether the long dispute has come to an end? But it is not the case. But it is not end. It has been reported that import of services rules namely Taxation of Services (Provided from outside India and Received in India) Rules has been challenged in matter of Ankit Exim Pvt. Ltd. vs. Union of India & Anr in SLP (C) No. 21190/2009.

The hon’ble Supreme court has issued notice by order dated 04.09.09 challenging the legality and validity of Section 66A in the Finance Act, 1994 and Taxation of Services (Provided from outside India and Received in India) Rules, 2006. This also makes it clear that there is still more doubt in the levy of service tax under reverse charge method. It is rightly said “Litigation never ends.”

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PJ/CASE STUDY/2009-10/023
21 December 2009

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PJ/CASE STUDY/2009-10/023 21 December 2009

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PJ/CASE STUDY/2009-10/023
21 December 2009