APRIL 22, 2014

By Pradeep Jain, CA Preeti Parihar, CA & Neetu Sukhwani, CA

IN the first part of our article, we had highlighted the fact that as per the Place of Provision of Service Rules, 2012, the service provided by the Tour Operators situated in India to persons located outside India is not considered as "export of service" under rule 6A of the Service Tax Rules, 1994.

Let's recall the contents of previous article. According to rule 6A of the STR if the six conditions prescribed therein are satisfied, the provision of service is considered as export of service and no service tax is leviable. One amongst these conditions is that the place of provision of service should be outside taxable territory as per Place of Provision of Services Rules, 2012. This condition is not satisfied in case of tour operators as their services are in nature of intermediary services which are specifically covered by rule 9 of the Place of Provision of Service Rules, 2012. This rule states that place of provision of services in this case is the location of service provider, i.e. within India. Therefore, one condition of rule 6A is not satisfied and services provided by tour operators cannot be considered as export of service despite fact that the valuable foreign currency is received. This article is an attempt to analyse the provisions as regards service tax liability under reverse charge mechanism on import of services as they concern the services of tour operators.

Service tax on Import of Service: Backdrop:-

In the positive list scenario, the charge of service tax on services received from outside India were contained in section 66A of the Finance Act, 1994 wherein it was stated as follows:-

(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 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 the 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.

Further, Taxation of Services (Provided from outside India and Received in India) Rules, 2006 were also in force vide Notification no. 11/2006-Service Tax dated 19.04.2006.

In simple words, there were only two conditions for determining the fact whether there was import of service and whether there was any service tax liability under reverse charge on the service recipient as follows:-

1. If any of the services specified in the charging section 66 (105) were being provided by the person who had fixed establishment or had permanent address or usual place of residence in a country other than India, i.e., in a foreign country, AND

2. The said services were received by a person who had fixed establishment or permanent address or usual place of residence in India.

If both the above conditions were satisfied, the service tax was payable by the recipient of taxable service located in India.

Reverse charge mechanism on import of service under negative list regime:-

The service tax on import of services by way of reverse charge mechanism has been a matter of constant litigation since its inception date 18.04.2006. The service tax under Reverse Charge Mechanism is complex levy and the introduction of the Place of Provision of Service Rules, 2012 in the negative list regime has done the task of adding fuel to the fire of complicacy of Reverse charge.

With the introduction of negative list regime, the service tax law underwent a drastic change and the said Taxation of Services (Provided from outside India and Received in India) Rules, 2006 were rescinded.

In the post negative list scenario, according to the new charging section 66B, all the services (except those specified in the negative list under section 66D and the mega exemption notification no. 25/2012-ST dated 20.06.2012) that are provided or agreed to be provided by one person to another in the taxable territory for a consideration are leviable to service tax. Therefore, the provision of service in a taxable territory is essential for imposition of service tax. Furthermore, the place of provision of service is to be determined according to the Place of Provision of Service Rules, 2012.

Consequently, provisions regarding the taxability of import of services have also been amended. Now, the recipient of service will be liable to pay service tax when cumulatively the following conditions are satisfied:-

1. Services are rendered by person located in non-taxable territory, i.e., outside India (including Jammu and Kashmir).

2. As per the provision of Place of Provision of Service Rules, 2012, the place of provision of service is in taxable territory.

3. The services are received by the person located in a taxable territory, i.e. India (except State of Jammu and Kashmir).

On analysing the amendment made in the provisions concerning the leviability of service tax on import of services under the negative list scenario, it is found that apart from the condition that the services are provided by the person located outside India and received by the person located in India, one more vital condition has been added according to which the place of provision of service should be in taxable territory. This change has been made primarily to harmonise the provision with respect to the new charging section that levies service tax on the services provided by one person to another in the taxable territory. As the provision of service in taxable territory has been made an essential requirement for levy of service tax, it was obligatory to add the said condition for levying service tax on import of service also. With the introduction of the condition as regards place of provision of service in the taxable territory, the status of Place of Provision of Service Rules, 2012, has become extremely important.

Rule 9 of Place of Provision of Service Rules, 2012:-

The Place of Provision of Service Rules have been drafted to implement the provisions of the new charging section 66B of the Finance Act and to ensure the levy of service tax under various circumstances. However, in the effort of making the levy of service tax compatible with the charging section, the legislature deviated from its essence as regards the leviability of service tax on import of services. Let's have a look at the provision contained in Rule 9 of the Place of Provision of Service Rules, 2012 vis-à-vis chargeability of service tax on import of service.

"Rule 9 - Place of provision in respect of following services shall be the location of the service provider:-

(a) Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders;

(b) Online information and database access or retrieval services;

(c) Intermediary services;

(d) Services consisting of hiring of means of transport, upto a period of one month."

It is further worth mentioning that the meaning of intermediary services has been explained in para no. 5.9.6 of the CBEC's Education Guide as follows:-

Generally, an "intermediary" is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two supplies at any one time:

i) the supply between the principal and the third party; and

ii) the supply of his own service (agency service) to his principal, for which a fee or

commission is usually charged.

For the purpose of this rule, an intermediary in respect of goods (such as a commission agent i.e. a buying or selling agent, or a stockbroker) is excluded by definition.

Also excluded from this sub-rule is a person who arranges or facilitates a provision of a service (referred to in the rules as "the main service"), but provides the main service on his own account.

In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered:-

Nature and value : An intermediary cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back 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'.

Thus, for the specified services covered under rule 9 of the Place of Provision Of Services Rules, 2012, the place of provision of service is the location of service provider.

Intermediary services under rule 9 of POPS Rules: Whether taxable as import of service?

At present, we all are under impression that if a taxable service is received by a person located in India from a foreign service provider there is service tax liability on the service recipient under reverse charge mechanism. But this is not so in every case in the negative list scenario read with the Place of Provision of Service Rules, 2012.

If we analyze the situation of service tax liability with respect to the services of an overseas tour operator availed by a person located in India, it leads to a very strange interpretation that such service is not covered under "import of service" and consequently there is no service tax liability. However, this interpretation only holds good if the services of tour operator are in the nature of intermediary services and there is principal-agent relationship between the service provider and service recipient. In other words, the service recipient located in India provides the services of tour operator in the capacity of principal and the service provider that is located outside India, merely acts as "tour operator agent". It is worth mentioning here that if the tour operator services provided by person located outside India is provided in the capacity of principal, the general Rule 3 of the Place of Provision of Service Rules, 2012 would be applicable and then the provision of service would be the location of the service receiver and the transaction would be leviable to service tax because the service receiver is located in the taxable territory, i.e., in India.

It would be prudent to recollect that in the negative list regime read with Place of Provision of Service Rules, 2012 three conditions are to be cumulatively satisfied so as to make a service recipient liable to pay service tax on import of services under the reverse charge mechanism.

Take the following example: ABC Company of India is engaged in the business of conducting tours and avails the services of various tour operator agents that are located in USA so as to enable them to plan and conduct tours outside India. As these services are not covered in the negative list under section 66D or the mega exemption notification no. 25/2012-ST, they are taxable if the conditions prescribed in charging section are satisfied. However, since the service provider is located outside taxable territory, we shall have to check whether it is an import of service liable to service tax in the hands of service recipient?

Accordingly, the leviability of service tax on import of the services of tour operator agents situated in USA is analysed in the table below as follows:-

On analysing the above, it is found that condition no. 3 is not satisfied as the place of provision of service comes as non-taxable territory. As the charging section 66B states that service tax is leviable only with respect to services provided in the taxable territory, no service tax is leviable under reverse charge on the import of the services of tour operators in the capacity of agents. It is worth observing that such an interpretation equally holds goods for all the specific services covered by the provision of Rule 9 of the Place of Provision of Service Rules, 2012.

Notification no. 30/2012-ST dated 20.6.2012: another side of coin:-

This notification has been introduced with the introduction of negative list regime. This prescribes the persons liable to pay the service tax in specified cases covered under Reverse charge mechanism. This notification prescribes that in case of 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 entire service tax would be payable by the recipient of such service. Interestingly, this notification does not specify any condition like place of provision of service for levying the service tax as import of service. However, at the same time, it is worthwhile to mention here that for implementing the service tax notifications and rules, it is must for a service to be covered in the provisions contained in the charging section. The charging section 66B specifically states that the "service should be provided in the taxable territory". Thus, the Place of provision of Services Rules, 2012 automatically comes into play. In our view, to make the notification no. 30/2012-ST come into play, firstly, the conditions of section 66B are to be satisfied. Unless the charging section is activated, the allied notifications cannot be enforced. Due to this reason, though, the notification no. 30/2012-ST does not speak about place of provision of service, yet it is equally important as charging section cannot be ignored while enforcing the provisions of any notification.

Before Parting:-

Although it has been claimed that the Place of Provision of Service Rules, 2012, have been meticulously drafted, but in some situations they are deviating from the basic theme of the levy of service tax on import and export transactions. As per the old Export of Service Rules, the services provided by the Travel Agents/Tour Operators that were situated in India to overseas service recipients were being treated as "exports" whereas with the introduction of the Place of Provision of Service Rules, 2012, the situation got reversed and the service tax is being levied on the services provided by such Travel Agents situated in India on the basis of the provision of Rule 9 of the Place of Provision of Service Rules, 2012. On similar footing, while the import of services related to travel agents/tour operators were being leviable to service tax under the reverse charge mechanism in the pre-negative list tax regime, the same is not leviable to service tax in the post-negative list scenario. It appears that the anomaly that has crept in the drafting of the Place of Provision of Service Rules, 2012 seeks to provide benefit of non-leviability of service tax to the import of services specified in Rule 9 and at the same time burdens the said services with service tax on their export. In nutshell, the drafting of Rule 9 departs from the basic theme of the government to make the exports "tax free" and to levy service tax on the import of services.

We would be glad to receive responses from discerning netizens on the subject matter.