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The statutory provisions use the words Services provided from outside India and received in India . However, generally, the tax is known as tax on Import of Services.

The principle of taxation of imports of services was initially introduced in service tax law with effect from June 2005, by means of insertion of an Explanation to the erstwhile Section 65(105) of the Finance Act, 1994.

This Explanation was further supported by the then Rule 2(1)(d)(iv) of the Service Tax Rules-which stated that in relation to any taxable service provided by a non-resident, the Indian resident who received the service would be required to pay the tax.

The Hon ble Supreme Court, in the case of Sulochana Amma v Narayanan Nair (1995, 77 ELT 785), held that

it is settled law that an explanation to a section is not a substantive provision by itself.

It is entitled to explain the meaning of the words contained in the section or to clarify certain ambiguities or clear them up.

It becomes a part and parcel of the enactment. Its meaning must depend upon its terms.

Therefore, the explanation normally should be so read to harmonise with and to clear up any ambiguity in the same section.

Thus, the legality of the Explanation in creating a tax charge on import of services in India was doubtful. A service is considered as an import, based on the criteria provided in the Import Rules in reference to the category under which the service is covered.

Once a service is considered as an import, the reverse charge mechanism is applied in terms of the present Rule 2(1)(d)(iv) of the Service Tax Rules-

which states that in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India,

the recipient of such a service is liable to pay the service tax, under Section 66A of the Act.

Section 66A

New section 66A(1) (effective from 18-4-2006) provides that where any service specified in section 65(105) of Finance Act, is,

(a) 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

(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 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

Exemption to Individual Receiving the Service

First proviso to section 66A(1) states that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply [Similar exemption was given vide notification No. 25/2005-ST dated 7-6-2005. Now this notification has been rescinded w.e.f. 19-4-2006, since the provision has been made in main section itself].

Branch is also establishment

Explanation 1 to section 66A make it clear that 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.

Services Provided and Consumed Abroad Cannot Be Taxed in India

Even otherwise, it is highly doubtful if tax can be levied on services when service is provided and consumed abroad just because service receiver has a place of business in India. Section 64(1) of Finance Act, 1994 states that provisions of Chapter V of the Finance Act, 1994 (which contain provisions relating to service tax) extend to whole of India except J&K. Thus, the Act does not have any extra-territorial jurisdiction. It is doubtful if such jurisdiction can be created by adding an explanation.

Stay against operation of the explanation under section 65(105) was granted for a period of four weeks from 3-2-2006 by Madras High Court in writ petition No. 3122 of 2006 in case of Tamil Nadu Spinning Mills Association.

Service Provided from Outside India and Received in India

Though scope of section 66A is wide, it can be argued that service tax is payable only if the service falls within the definition of Service provided from Outside India and Received in India as defined in Taxation of Services (Provided from Outside India and Received in India) Rules, 2006

The rules classify all taxable services in three categories, namely

(i) Services in relation to immovable property

(ii) Services to be performed in India and

(iii) Services received by recipient located in India. The classification is same as per export of Service Rules.

Person Liable to Pay Service Tax

As per Rule 2(1)(d)(iv) of Service tax Rules (amended w.e.f. 19-4-2006), person liable for paying the service tax means

in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service.

Thus, person receiving service in India will be liable to pay service tax. He will have to register under Service tax provisions and submit returns.


The provision that service receiver is liable to pay service tax is termed as Reverse Charge or tax shift mechanism , as per press note dated 7-6-2005 issued by Central Government.

Under the reverse charge method, a legal fiction is created treating as if the recipient had himself provided the services domestically and accordingly, the recipient of services is treated as deemed service provider .

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suparna k s
Category Service Tax   Report

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