JUNE 09, 2009

By Shivani Shah, CA

THE Finance Act, 2006 inserted a new section 66A in the Finance Act, 1994 (-Act-) dealing with statutory provisions of service tax. According to the explanatory notes to the Finance Bill, 2006, the objective of inserting the new section 66A was to levy service tax on taxable services 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 received by a person who has his place of business, fixed establishment, permanent address or usual place of residence, in India under reverse charge method.

As a consequence, explanation added at the end of section 65(105) of the Act in 2005 was omitted. The new section paves way to the clear legislative intention of the Central Government on the taxation of taxable services rendered by non-resident persons from outside India (i.e., outside the territorial limits of India) to a person in India.

Person Liable

Section 68 of the Act provides for payment of service tax. Accordingly, every person providing taxable service to any person shall pay service tax at the specified rate in prescribed manner. Sub-section (2) provides that Central Government is empowered to notify any taxable service on which service tax shall be paid by such person in prescribed manner as notified and such person shall be the person liable for paying service tax in relation to such service. Notification no. 36/2004-ST as amended by Notification no. 9/2006-ST dated 19/04/2006 notified that service recipient shall be the person liable for any taxable service provided or to be provided from a country other than India and received in India under section 66A of the Act. Rule 2(1)(d) of the Service Tax Rules, 1994 (-Rules-) prescribe person liable for paying service tax. According to clause (iv), taxable service received from a non resident were taxable in India in the hands of the recipient receiving such taxable service in India. W.e.f. 19.4.2006, the recipient of service has been made the person liable in relation to any taxable service provided to be provided by any person from a country other than India and received by any person in India.

Judicial View

In the case of Aditya Cement vs. CCE, Jaipur II - 2007-TIOL-236-CESTAT-DEL, it has been held that Rule 2(1)(d)(iv) of the Rules only defines the person liable to pay service tax and cannot shift the liability on the person other than service provider unless proper notification is issued under section 68(2) of the Act. In the instant case, Rule 2(1)(d)(iv) of the Rules was examined with reference to Notification no. 36/2004-ST.

In another case of Molex (India) Ltd. vs. CCE (Appeals), Bangalore - 2007-TIOL-2305-CESTAT-BANG, it was held that question of leviability of service tax on the service recipient prior to 1.1.2005 has to be decided by a larger bench in view o f the conflicting decisions on the matter. As noted above, in the case of Aditya Cement (supra), it was held that service tax liability on recipient in case of import of service is only w.e.f 1.1.2005 in view of Notification no. 36/2004-ST and that the rules are subservient to the sections and if a section do not provide discharge of service tax liability by recipient of services from non-resident having no office, then it would be futile exercise to rely upon rules to collect the tax. (This was further followed by Ispat Industries Ltd. vs. CCE, Raigad - 2007-TIOL-399-CESTAT-MUM.In other case of Calvin Wooding Consulting Ltd. vs. CCE, Indore - 2007-TIOL-670-CESTAT-DEL, contrary view was taken that the liability to pay service tax for the services received from abroad is on the recipient [Also see Samcor Glass Ltd. vs. CCE, Jaipur 1 - 2007-TIOL-938-CESTAT-DEL]

In CCE vs. Rainbow Denim Ltd. - 2009-TIOL-389-CESTAT-DEL it was held that where service was provided by a non resident from outside India who does not have any office in India, having been specified as taxable service w.e.f. 1/1/2005 under Notification no. 36/2004-ST, receipt of such service could not be held liable for paying service tax prior to  1/1/2005.

In BHEL vs, CCE - 2009-TIOL-634-CESTAT-DEL, it was held that where service is provided by foreign companies who have no office in India, demand of service tax form service recipient is not sustainable for the period prior to 1/1/2005.

In Hindustan Zinc Ltd. vs. CCE, Jaipur - 2008-TIOL-1149-CESTAT-DEL-LB, larger bench observed that levy of service tax is on rendering to taxable service and not on person. Definition clause can not be read as substantive. The manner of collection of tax is not extendable to include person liable to pay service tax. It was held that service recipient of consulting engineering service provided from outside India was not liable to pay service tax prior to 1/1/2005. Since the liability to pay service tax is generally on the provider of service, where liability is to be fastened on any other person, the services in relation to which liability is to be so fastened, has also to be identified and specified. The services were notified w.e.f. 1/1/2005 vide Notification no. 36/2004-ST.

Section 66A

The Finance Act, 2006 inserted section 66A to levy service tax under reverse charge method on taxable services provided from outside India to a recipient in India. At the same time, explanation at the end of sub section (105) of section 65 of the Act as inserted in 2005 was omitted which also provided for the similar provision.

Section 66A applies to specific situation where any taxable service specified in section 65(105) is provided by a person from outside India and received by a person in India and in such situation, section 66 does not apply. In case of deemed import of services, section 66A becomes the charging section instead of section 66. Thus, these two section are mutually exclusive.

Section 66A of the Act imposes two conditions which needs to be satisfied for taxation of service tax on such imported services -

service must be received by a person in India

service provider must be situated outside India.

If both the above conditions are fulfilled, then only the question of levy of service tax arises. Import of services not meant for commercial use or business use shall not be taxable.

From When Liable - Judicial View

In a very recent case of Indian National Ship Owners Association vs. UOI - 2009 TIOL 150 HC MUM ST, the  High Court  held that -

(a) Notification no. 1/2002-ST dated 1/3/2002 does not levy service tax on the service recipient.

(b) Rule 2(1)(d)(iv) of the Rules does not apply to levy of service tax on services rendered  from outside India .

(c) Service recipient can not be made liable to pay service tax under Rule 2(1)(d)(iv) unless there is a provision in the Act.

(d) For services received outside India, Rule 2(1)(d)(iv) would not apply as service were received by assessee outside India and not in India.

(e) W.e.f. 18.4.2006, vide section 66A, a persons resident in India or having business in India has been made liable to service tax as a recipient of service outside India.

(f) Members of petitioner association receiving various services outside India from non- residents were not liable to service tax period prior to 18/4/2006.

The court observed that vide notification no. 1/2002 (supra) service which is rendered or provided in the Continental Shelf Exclusive Economic Zone and Territorial Waters of India has been made taxable that notification does not have the effect of levying service tax on the recipients of the service. Therefore, levy of service tax on the members of the petitioners association on the basis of notification dated 1st March, 2002 is plainly without authority of law.

Where the vessels and ships owned by members of petitioner association received service outside India, court observed tax service tax can not be levied on the basis of Rule 2(1)(d)(iv) of the Rules.

Because of the enactment of section 66A of the Act, a person who is resident in India or business in India becomes liable to be levied service tax when he receives service outside India. From section 66A it is apparent that there was no authority vested by law in the respondents to levy service tax on a person who is resident in India, but who receives service outside India. In that case till section 66A was enacted a person liable was the one who rendered the service. In other words, it is only after enactment of section 66A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider. Before enactment of section there was no such provision in the Act and therefore, the respondents had no authority to levy service tax on the members of the petitioners association. In the ultimate analysis, court held that assessees, members of Ship owners Association receiving various service outside India from non resident were not liable to service tax for the period form 1st March, 2002 to 17th April 2006.

In the case of Malwa Cotton Spinning Mills vs. CCE - 2009-TIOL-185-CESTAT-DEL it was held that services rendered by non resident from outside India is not a taxable service for the period prior to insertion of section 66A w.e.f. 18.4.2006.

Conclusion

Based on the statutory provisions and judicial pronouncements, following position emerges -

(i)  Levy of service tax is on rendering of taxable service and not on person.

(ii) No service tax is leviable on services received from abroad prior to 1/1/2005.

(iii) Receipt of taxable services from abroad from service providers not having office in India is taxable w.e.f. 1/1/2005.

(iv) Taxable services rendered is India by a service provider from outside India shall be taxed in India under section 66A of the Act w.e.f. 18/4/2006 and service receiver shall be liable to pay service tax under reverse charge method.