NOTE ON IMPORT AND EXPORT OF SERVICES A.R. KRISHNAN Chartered Accountant 1. SITUS OF TAXATION TERRITORIAL JURISDICTION 1.

1 By section 64(1), the Act extends to the whole of India except the state of Jammu and Kashmir, and by section 64(3), the levy applies to taxable services provided. CHARGE OF SERVICE TAX 1.2 Section 66 is the charging section of the Act, which provides that there shall be levied a service tax @ 10% of the value of taxable services referred to in various clauses of section 65(105) of the Act which defines taxable service. SITUS OF TAXATION 1.3 Three propositions [s. 64(1), s.64(3) & s.66] : There must be a service The service must be a taxable service The service must be provided [in India ?]

Service + Taxable Service + Provided in India 1.4 Two issues arise in this context (i) (ii) Whether the services must be provided in India ? What is the meaning of the term provided ?

Whether the services must be provided in India ? 1.5 On a reading of section 64(3) and section 66 it is clear that the taxable event is the provision of service. However, unlike other enactments neither section 64 nor the charging section viz., section 66 contain an express provision of the place where the taxable event i.e. provision of services must happen. For example by section 3 of the Central Excise Act, 1944 manufactured in India. the levy of excise duty falls on goods

Similarly the United Kingdom VAT Act, 1994 by section 1 provides as follows:
1. Value added tax.- Value added tax shall be charged, ..(a) on supply of goods or services in the United Kingdom .

Further section 4 reads as follows :

4. Scope of VAT on taxable supplies : (1) VAT shall be charged on any supply of goods or services made in the United Kingdom,

1.6

However, on a conjoint reading of section 64(1), 64(3) and 66 one may state that it is implicit in the scheme of the Act that the taxable event i.e. provision of services must happen in the taxable territories i.e. India. Circular No. 36/4/2001-ST dated 8.10.2001 clarified the position as follows :
The expression India includes the territorial waters of India. Indian territorial waters extend up to twelve nautical miles from the Indian land mass. Chapter V of the Finance Act which governs the levy of Service Tax has not extended to the levy to designated areas in the Continental Shelf and the Exclusive Economic Zone of India (as has been done in case of Central Excise vide Notification No. 166/87-C.E., dated 11-6-87 and in case of Customs by Notification Nos. 11/87-Cus., Dated 14-1-87 & 64/97Cus., dated 1-12-97). It is, therefore, clarified that the services provided beyond the territorial waters of India are not liable to Service Tax as provisions of Service tax have not been extended to such areas so far.

This further substantiates the fact that the services must be provided in India. However, w.e.f. 1.3.2002 India includes designated areas in the Continental Shelf and Exclusive Economic Zone of India [notification no. 1/2002 dated 1.3.2002]. Hence w.e.f. 1/03/2002 services provided beyond the territorial waters of India [i.e. 12 nautical miles from the baseline] but in the designated areas of the Continental Shelf and Exclusive Economic Zone of India which extends to 200 nautical miles from the baseline would also be liable for service tax. 1.7 Services provided in India what does it mean? The next issue is for a service to be treated as being provided in India-

(i)

whether the services must be performed in India ? or

(ii)

whether the services must be supplied in India ?

If it is interpreted as services performed in India the taxable base would be service provider centric. If it is interpreted as services supplied in India the taxable base would be service receiver / customer centric.

Provided

Performed

Supplied

Service provider centric

Service receiver / customer centric

Departmental clarifications

1.8

Departmental clarifications1 lead us to interpret provided as rendered and rendered means performed. Hence one may take a view that services performed in India are liable and services performed abroad are not liable. Accordingly, the word provided in India maybe considered to mean performed in India and hence the taxable base would be service provider centric.

1.9

However, circular No. 56/5/2003 dated 25/04/2003 issued by the Ministry of Finance in the context of interpretation of export of services has clarified that the Service tax is destination-based consumption tax and it is not applicable on export of services. Thus, a view maybe taken that services are deemed to be provided where the services are consumed. Accordingly the taxable base could be considered as customer centric. Whether services provided in India to decide - Place of Supply Rules required

1.10

Considering the diverse nature of services the word provided could be performed in India or supplied in India depending on the nature of service. For instance, in case of cargo handling services where physical

Para 2.6 of M.F. D. R. Letter F. No. 43/10/97-TRU dated 22.8.97 (Tour operators); Circular F. No. B-11/1/98-TRU dated 7-10-98) (Market research agencies).

performance of the service is a decisive factor, the term provided in India may be interpreted as performed in India. However, in a service like management consultancy service, which is of an intellectual nature the term provided in India may be interpreted as supplied in India. Hence, there is a requirement for a Place of Supply Rules providing where the service is considered to be provided depending on the nature of service. In the UK VAT Act, 1994 there are separate Place of Supply Rules for each service to determine the place of supply and the territorial jurisdiction for taxation. In our country too the Act should clearly provide for this. Separate supply rules maybe drafted qua each type of service. Similar rules have been adopted in case of Export of Services Rules, 2005 (Export Rules) which has been notified w.e.f. 15.3.2005 [explained below]. But the Place of Supply Rules must be applicable to all provision of services whether in the nature of import or export as it exists in the European Union e.g. United Kingdom, Ireland, etc.

2.

EXPORT OF SERVICES

Introduction 2.1 The Finance (No.2) Act, 2004 had empowered the Central Government to make rules to provide for (i) (ii) (iii) determining export of taxable services; granting exemption to, or rebate of tax paid, on services rebate of tax paid on input services consumed, or duties paid

exported; or on goods used, for providing taxable services which are exported. Accordingly the Central Government has notified the Export of Services Rules, 2005 (Export Rules) w.e.f. 15.3.2005 which inter alia set out the criteria to decide when a service is deemed to have been exported, keeping in view the nature of the different taxable services. The significant features of the Export Rules are given below.

Taxable services exported are exempt

2.2

All taxable services maybe exported without payment of service tax. What is export of service ?

2.3

Broadly, the rules have categorized the services in three categories and then defined what would constitute export of services for each category. The categories are: (i) (ii) (iii) Immoveable Property category Performance based category Location of service recipient category

Immovable property category 2.4 In case of 9 services (See Table A of Annexure 1), which are provided in relation to immovable property, the services shall be considered as exported if the immovable property is situated outside India. [The service must be delivered outside India and used in business or for any other purpose outside India; and

Payment for such service provided is received by the service provider in convertible foreign exchange.]2

Performance based category 2.5 In case of 50 services (See Table B of Annexure 1), the services shall be considered as exported if (i) (ii) the services are wholly or partly performed outside India. [the service must be delivered outside India and used in business or for any other purpose outside India; and payment for such service provided is received by the service provider in convertible foreign exchange.]3 Location of service recipient category 2.6 In case of 28 services (See Table C of Annexure 1), the services shall be considered as exported in case -

(iii)

2 3

Inserted w.e.f. 16.6.2005. ibid.

(a)

where the services are provided and used in or

in relation to commerce or industry (i.e. commercial use), and the recipient of service is located outside India. However, if such a recipient of services has any commercial or industrial establishment or office in India, the services shall be considered to be exported only if (i) Order for provision of such service is made by the recipient of the service from any of his commercial or industrial establishment or any office located outside India; (ii) (iii) (b) The service so ordered is delivered outside India and used in business outside India; and Payment for such service provided is received by the service provider in convertible foreign exchange where the services are not provided and used in or in relation to commerce or industry (such as for personal use), if the recipient of the service is located outside India at the time when such services are received. Rebate on tax paid on services exported

2.7

The Central Government has w.e.f. 19th April, 2005, notified conditions and procedures, for grant of (a) rebate of tax paid on services exported ; or

(b) rebate of
i. ii. service tax paid on input services used, or duties paid on goods used,

for providing taxable services which are exported.

3.

IMPORT OF SERVICES ?

Scope of taxable service enlarged by Explanation to section 65(105) - to tax import of services ?

3.1

The Act or rules have not used the words import of services. However, the scope of taxable service has been enlarged by the Finance Act, 2005 w.e.f. 16.6.2005 presumably to tax import of services by inserting an

explanation

in

section

65(105)

defining

taxable

service

which

is

reproduced as under:
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 purpose of this clause.

A plain reading of the Explanation leads to a conclusion that taxable services provided by a person based outside India to a person based in India, anywhere in the world would be considered as a taxable service. Issue import of the explanation 3.2 Once Explanation gets triggered the service is a taxable service. However, the issue is whether all taxable services irrespective of the place where they are provided are liable for service tax ? In other words, say, where a service provider who is a US resident provides services to a service receiver who is an Indian resident, would it be taxable services are provided (i) (ii) (iii) In US ; or In India; or Anywhere in the world say in France ? Another issue is whether the place of receipt of service is important ? To put it in a tabular form : Service Provider US resident Services performed in India US US France in India India US France Service recipient Indian Resident Taxable in India u/s. 65(105) ? Yes (even prior to 16.6.2005) ? ? ? Services received if the

What is the import of the explanation ?

Three views

No change in situs since s. 64 & 66 not amended.

Only those Services taxed as are received in India i.e. recipient must be in India at the time of receipt of service

Services taxed even if recipient is abroad at the time of receipt of service

View 1 View 2 Contention in support of view 1 : 3.3

View 3

Cir. No. B1 / 6 / 2005 - TRU dated 27.7.2005 para 26.7 states as under:
Charging4 service tax from the recipient where the service is provided by a non-resident is a well accepted international practice. This was enunciated in Rule 2(1)(d)(iv). In this years budget, for removal of doubts, suitable explanation has been made in section 65(105) of the Finance Act in this regard (as reproduced in para 26.1).

The above presumably substantiates the view that the explanation has not enlarged the scope of taxation to cover import of services within the ambit of service tax but only clarified the existing provision that services provided by a non-resident5 to an Indian resident6 is liable for service tax. Further, no amendment has been made to sections 64, 65(105) or 66 of the Act.

Contention in support of view 2 : 3.4 The Memorandum explaining the provisions of Finance Bill, 2005 states as under:
(1) The Finance Act, 1994 is being amended to:
4 5

Charging or collecting ? 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. A person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India.

(a) Extend the scope of taxable services so as to include the services to be provided and to clarify that taxable services would include such services provided from outside India to a recipient in India [Section 65(105)].

3.5

Cir. No. B1/6/2005- TRU dated 27.7.2005 para 26.5 states as under:
These provisions are intended to take care of taxable services where the service provider is located outside India and the recipient of service is located in India. [at the time of receipt of service ?].

3.6

Thus, the Explanatory Memorandum and the circular mentioned above supports the view that the explanation seeks to tax those services provided from outside India but received in India i.e. when there is a flow of services from abroad to India. Contention in support of view 3

3.7

Two exemptions are notified w.e.f. 16.6.2005 :

(i)

Services received and consumed by an individual abroad other than for the purpose of business. [Not. No. 25/2005 dated 7.6.2005]

(ii)

Specified services provided by a non-resident in relation to ships and received and consumed abroad [not. No. 22/2005 dated 7.6.2005]

The above 2 exemptions indicate that the intention of the Government is to bring all services provided to an Indian resident anywhere in the world within the ambit of service tax. However, 2 exemptions cannot conclusively decide the situs of taxation. Further, as noted in para 3.3 sections 64 or 65(105) or 66 of the Act has not been amended. 3.8 After examining the three views, it is important to know what is relevant for the purpose of deciding the situs of taxation in the context of service tax. This may be represented by way of a diagram given as under:

What is relevant ?

Service Provider in India

Service receiver

Service

Indian

In India

s. 64 The tax shall apply on taxable service provided s. 66 Charge on value of taxable services s. 67 Value - gross amount charged for taxable services provided Entry 92 C of List I of 7th Sch. to Constitution Tax on services The tax is on services Gujarat Ambuja v. UoI (2005) 182 ELT 33 (SC); Tamil Nadu Kalynana Mandapam v. UoI (2004) 167 ELT 3 (SC)

3.9

Here, one may note the following: (i) (ii) (iii) (iv) section 64 of the Act provides that the tax shall apply to taxable service provided; section 66 of the Act provides that service tax shall be charged on value of taxable services; section 67 of the Act provides that the value of taxable services shall be the gross amount charged for services provided; Entry 92C of List 1 of the Seventh Schedule to the Constitution provides for Tax on Services Thus it appears that the relevant factor to decide the situs of taxation would be the service and not the service recipient. Further, if the explanation were to be interpreted as covering even situations where services provided by non-residents outside India are liable for service tax, it would also result in an anomalous situation. Consider a situation where a service is provided by a person who has a business establishment in the US to an Indian oil exploration company outside Indian Territorial waters. The service as per section 65(105) read with section 66 would attract service tax since services provided by a person who has a business establishment outside India to a person who has a business establishment in India would be a taxable service. However, companies having business

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establishments in India who provide the same service to the said Indian oil exploration company outside territorial waters would not be liable for service tax. Thus, the interpretation would lead to an anomalous situation which must be avoided. Hence it is important to determine the situs of the service in order to determine the situs of taxation for the purpose of service tax and not the situs of the service provider or service recipient. What is relevant is the service which is provided and if the service is provided in India it would be liable for service tax.

3.10

Of course the word provided could be performed in India or supplied in India depending on the nature of service as explained in para 1.10. Hence, there is a requirement for a Place of Supply Rules providing where the service is considered to be provided depending on the nature of service. Reverse Charge w.e.f. 16.6.2005 Who is liable to to pay - Rule 2(1) (d) (iv)

3.11

In this context the Rule 2 (1) (d) (iv) dealing with the liability to pay service tax by recipient of services in case of service provided by overseas persons has also been amended. The comparative position of Rule 2(1) (d) (iv) may be noted as under:

Rule 2(1)(d)(iv) prior to 16.6.05 In relation to taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India, the person receiving taxable service in India.

Rule 2(1)(d)(iv) post 16.6.05 In relation to any taxable 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 provider does not have any office in India, the person who receives such service and has place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India.

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ANNEXURE 1 CATEGORISATION OF SERVICES UNDER THE EXPORT OF SERVICES RULES, 2005 List of services considered as exported if it relates immoveable property situated outside India TABLE A Sl. No. 1 2 3 4 5 8 [6 7 8 Sub-clause of clause (105) of section 65 d p q v zzq zzza zzzb zzzc Nature of service General Insurance Business (only to the extent it relates to immoveable property) Architect Interior Decorator Real estate agent 7 [Commercial and industrial Construction Service] Site formation and clearance, excavation and earthmoving and demolition services Dredging Survey and map making by a person other than an agency under the control of, or authorized by, the Government (only to the extent it relates to immovable property) Construction of complex]

zzzh

List of services considered as exported if partly or wholly performed outside India. TABLE B Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
7 8

Sub-clause of clause (105) of section 65 a f h i j l m n o s

Nature of service Stock broker Courier agency Custom house agent Steamer agent Clearing and forwarding agent Air travel agent Mandap keeper Tour operator Rent-a-cab scheme operator Practicing Chartered Accountant

Enlarged and renamed by Finance Act, 2005 for Construction Service w.e.f. 16.6.05. Inserted with effect from 16.6.2005 vide Export of Services (Amendment) Rules, 2005.

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11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 9 [48 . 49. 50.

t u w x y z zb zc zi zj zn zo zq zr zt zu zv zw zza zzc zzd zzf zzg zzh zzi zzj zzl zzm zzn zzo zzp zzs zzt zzv zzw zzx zzy zzzd zzze zzzf

Practicing Cost Accountant Practicing Company Secretary Security agency Credit rating agency Market research agency Underwriter Photography Convention services Video tape production services Sound recording Port services (major ports) Authorised service station (Motor car or two wheeled motor vehicles) Beauty parlour Cargo handling services Dry cleaning Event management Fashion designer Health club and fitness center Storage and warehousing Commercial training or coaching Erection, commission and installation Internet caf Maintenance or repair Technical testing and analysis Technical inspection and certification Authorised service station (light motor vehicles) Port services (minor ports) Airport services Transport of goods by Aircraft Business exhibition services Goods transport agency services Opinion poll agency Outdoor caterer Survey and exploration of mineral Pandal or shamiana contractor Travel agent (other than rail and air travel agent) Forward contract services CLEANING SERVICES SERVICES PROVIDED BY CLUBS OR ASSOCIATIONS PACKAGING SERVICES]

Inserted with effect from 16.6.2005 vide Export of Services (Amendment) Rules, 2005.

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List of services considered as exported if recipient of the service is located outside India subject to certain conditions TABLE C Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 11 [26. 27. Sub-clause of clause (105) of section 65 b c d e g k r za zd ze zf zg zh zk zl zm zs zx zy zz zzb zze Zzk zzr zzu zzz zzzc NATURE OF SERVICE Telephone Pager General Insurance Business (other than relating to immoveable property) Advertisement agency Consulting engineer 10 [Manpower recruitment and supply agency] Management consultant Scientific and technical consultancy services Leased circuit services Telegraph Telex Facsimile On-line information or database access or retrieval services Broadcasting services Insurance auxiliary services in relation to general insurance Banking and other financial services - Banks, FIs, NBFCs, other body corporates and commercial concerns Cable services Life insurance business Insurance auxiliary services relating to Life insurance Rail travel agent Business auxiliary services Franchise services Foreign exchange broker (other than referred in sub-clause (zm) Intellectual property services Radio and television programme producer Transport of goods (other than water) through pipeline or other conduit Survey and map-making by a person other than an agency under the control of, or authorized by, the Government (other than relating to immovable property)

10 11

Enlarged and renamed by Finance Act, 2005 for Manpower recruitment agency w.e.f. 16.6.05. Inserted with effect from 16.6.2005 vide Export of Services (Amendment) Rules, 2005.

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28.

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Mailing list compilation and mailing]

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