The proposed taxation of services (provided from outside India and received in India) Rules, 2006

This article on service tax provides insight on the proposed section 66A on the reverse charge mechanism. Further, few important CESTAT rulings are discussed herein.

1. Section 66A-Reverse charge

The Bill has introduced a separate section 66A for the reverse charge mechanism

The section is reproduced below:–

"66A.Charge of service tax on services received from outside India.

1. Where any service specified in clause (105) of section 65 is –

1. 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
    

2. Received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India.

2. Where a person is carrying on a business through a permanent establishment in India & 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."

To summarize:

• If a person who is based outside India provides services to a person based in India the recipient is treated as a "provider of service" and accordingly all the provisions of the act as they apply in relation to a provider of taxable service would apply to him. He would require to register, make service tax payment, and file returns as a deemed service provider.
   

• When taxable services are provided by a person based outside India to a person based in India, the services would be considered by a fiction of law as taxable services provided (by the recipient) in India;
   

• Where the recipient is an individual and receives services from outside India for the purpose otherwise than for use in any business or commerce i.e. for personal use, the provisions of section 66A shall not apply; i.e., the individual would not be treated as a provider of service.
   

• The country of establishment of the service provider directly concerned with the provision of service shall be treated as the country from which the service is provided. Thus, where a service provider who has his H.O in UK and a branch in India provides services directly from his headquarters (without intervention of the branch in India) to an Indian company, the provider shall be treated as providing services from UK although he has an establishment in India. In such cases also the reverse charge mechanism would apply.
   

• 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. However, it is to be noted that the term "permanent establishment" has not been defined.
   

• A " branch" or an "agency" is treated as a "business establishment".
   

• The "usual place of residence" of a company is the place of incorporation or constitution.

The proposed taxation of services (provided from outside India and received in India) Rules, 2006

The Draft Import Rules inter alia set out the criteria to decide when a taxable service is to be treated as "provided from outside India and received in India". The same is based in lines with principles followed for Export of Service Rules, 2005. The significant features of the Draft Import Rules are given below

1. Reverse charge mechanism

Where a taxable service is provided by a person who is based outside India to a person based in India then –

1. The service "provided from outside India and received in India" would be treated as a taxable service;
    

2. The recipient is by fiction of law treated as having "provided" the service in India and accordingly all the provisions of the act as they apply in relation to a provider of taxable service would apply to him. Thus, he would have to register, make payment, and file returns, as a service provider would do.

2. When is a service "provided from outside India and received in India"?

Broadly, the Draft Import Rules have categorized the services in three categories and then defined when a service can be treated as "provided from outside India and received in India " or for short "import" of services for each category. The categories are:

1. Immovable property category

2. Performance based category

3. Location of service recipient category

Immovable property category

In this category, services (which are provided in relation to immovable property shall be considered as imported if the immovable property is situated in India. Refer Table A of Annexure 1)

Performance based category

In this category, services shall be considered as imported if the services are wholly or partly performed in India. (Refer Table B of Annexure 1)

Location of service recipient category

In this category, services shall be considered as imported in case the recipient of service is located in India and the services are used in relation to commerce or industry. (Refer Table C of Annexure 1)

Annexure 1

List of services considered as imported if it relates to
immovable property situated in India

TABLE A

List of services considered as imported if partly or wholly performed in India

TABLE B

List of services considered as imported if recipient of the service is located in India

TABLE C

In the case of general insurance services and Survey and map-making by a person other than an agency under the control of, or authorized by, the Government, to the extent the services relate to immovable property situated outside India, the services shall not be considered as import.

The above section will come in to effect from a date to be notified.

2. CESTAT Rulings

1. In case of M/s Adlabs vs. The Commissioner of Central Excise, Service Tax Commissionerate, Bangalore Appeal No: ST / 72 /2005, the Tribunal held that nowhere it is stated in Notification No.12/2003-ST dated 20-6-2003 that the inputs used in the photography should be mentioned in the invoice/bills issued to the customer. In view of clarification given by Boards letter in letter No.233/2/2003 Cx 4 dated 7-4-2004 addressed to Punjab Colour Lab Association and notification, the denial of benefit of deduction is not justified. However, the author is of the opinion that the above judgment with the due respect to the Hon. tribunal needs to be reviewed.
    

2. In case of M/s Prachar Communications Ltd vs. CCE, Mumbai-IV Appeal No. ST/1/03, the Tribunal held that Manufacturers cannot resist bar of unjust enrichment by issuance of credit notes to buyers, but Service Tax assesses can. Tribunal’s Larger Bench decision in the case of Grasim Inds will not apply to matter related to refund of service tax. In as much as the appellants have admittedly paid back excess service tax paid by them to their customers, they would be entitled to adjustment of the same in terms of Rule 6 of Service Tax Rules and this having been done by them they would be entitled to the refund of the excess tax paid by them. This is a milestone judgment, which may remove procedural difficulties in case of genuine refund cases.