Pradeep Jain - Chartered Accountant

Query

(S SAMPATH) Posted On: 11 Feb, 2014

Facts of the Case: Our company is sending various equipments to Overseas OEMs/OEM Authorized service centers. These equipments were overhauled & we are paying charges towards overhaul charges, spares consumed & testing charges. The machines after overhauls, return back to India . Custom duty is being paid by us on total amount paid to vendor i.e overhauling charges, spares consumed & other Charges . Further, we are also paying service tax on overhaul charges under reverse mechanism & cenvat credit is being claimed on service tax paid on overhaul charges. Query : Can overhaul service charges paid to foreign vendors for above services at their premises( located outside taxable territory) be qualified as services provided in the taxable territory ? . If not , payment of service tax under Reverse Mechanism is applicable to our company ?. Relevant provisions of Service Tax Act & Rules are given below: Section 66 B: Charge of services tax on and after finance Act 2012 There shall be levied a tax at the rate of 12% on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Section 66 C: Determination of place of provision of services: (1) The central Govt may, having regard to the nature and description of various services, by rules made in this regard, determine the place where such services are provided or deemed to have been provided or agreed to be provided or deemed to have been agreed to be provided. (2) Any Rule made under sub section (1) shall not be invalid merely on the ground that either the service provider or the service receiver or both are located at a place being outside the taxable territory. Place of Provision of Services Rules, 2012 Clause 4 : Place of provision of performance based services : The place of provision of services shall be the location where the services are actually performed, namely:- (a) Services provided in the respect of goods that are required to be made physically available by the recipient of the services to the provider of services, or to a person acting on behalf of the provider of service, in order to provide the service: Provided that when 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 services ; Provided further that this sub-rule is not apply in the case of a service provided in respect of goods that are temporally imported ….. Section 68 : Payment of service tax (1) Every person providing taxable services to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be specified. (2) Notwithstanding anything contained in sub-section(1) , in respect of such taxable services as may be notified by Central Govt in the Official Gazzatte, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rates specified in section 66 and all the provision 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. Provided that the Central Govt may notify the services and the extent of services tax which shall be payable by such person and the provision of this chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider. Reverse Charges Notification Under Section 68 (2) : Para 1 ( B) The taxable services provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory ; The extent of service tax payable thereon by the person who provides the services and the person who receives the services for the taxable services specified in (1) shall be as specified in the following table , namely :- Sl no Description of services Percentage of service tax payable by the person providing services Percentage of service tax payable by the person receiving the service 10 In respect of any taxable services provided or agreed to be provided by any person who is located in a non taxable territory and received by any person located in the taxable territory Nil 100%

As per Rule 4 of POPS Rules, Place of Provision of performance based services is where the goods are physically made available to service provider or to person acting on behalf of provider of services. In the present case, services are related to repair of equipments that are necessarily required to be sent to overseas Authorised Service Stations for repair purpose. Hence, the transaction is covered by Rule 4 of POPS Rules as the essential characteristic of a service to be covered under this rule is that the goods temporarily come into the physical possession or control of the service provider, and without this happening, the service cannot be rendered. Since, overhaul service charges paid to foreign vendors for above services at their premises located outside taxable territory are covered under this Rule, hence the place of provision shall be where performance takes place. Since the place of provision is a non taxable territory service tax shall not be applicable on the same. Consequently, there is no liability under reverse charge mechanism on overhaul charges paid to overseas Authorised Service Station

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