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Liability of Service Recipient

An overview

 

          The birth of Import of Services under the Finance Act, 1994 has been rather a silent incursion. The liability imposed on the receiver of a taxable service, in certain cases, where the provider of taxable service is outside India is termed as “import of service. It is now abundantly clear that import of taxable service from outside India attracts service tax and in that respect the liability has been specifically cast on the recipient of service receiving service in India. In order to examine the scope of liability of service recipient to discharge service tax on service provided by the non-residents, the relevant provisions of Finance Act, 1994 as amended (here-in-after referred to as Act), Service Tax Rules, 1994 (in short SERVICE TAX RULES, 94), etc, as it stood from time to time are enumerated here-in-below for ease of reference:

 

          From February, 1999 -15th August, 2002:

         

          In February, 1999, vide Notification no. 1/1999-ST dated 28-02-1999, a second proviso was inserted to Rule 6 of Service Tax Rules, 1994 to provide that when taxable service is provided by a non-resident, the liability to pay service tax will be on the non-resident or any person authorised by him on his behalf. The relevant extracts of the said notification is given here-in-below for reference:

         

               Rule 6- “Provided further that, in case of a person who is non-resident or is from outside India, does not have any office in India and is liable to pay service tax on taxable services provided in India,-

                        (i) the service tax thereon shall be paid by such person or on his behalf by any other person authorised by him, who shall submit to the Commissioner of Central Excise in whose jurisdiction the taxable services have been rendered, a return, containing the following details………………………………………………………………………………………………………………………………………………….”

          Hence, originally the liability was cast on the non-resident or his authorised agent.

 

          From 16th August, 2002

          The aforesaid legislation continued till 16-08-2002, when Rule 2(1)(d) of the SERVICE TAX RULES, 1994 was amended by way of insertion of clause (iv) in the said rule vide Notification No. 12/2002 dated 01-08-2002, whereby, it was provided that in relation to any 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 the taxable service in India, shall be liable to pay service tax. Simultaneously, aforesaid proviso to Rule 6 relating to payment of tax was deleted. New provision read thus:

 

                        “Rule 2(1)(d) “Person liable for paying service tax” means

          (iv) in relation to any 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.”;  

 

          Notified Taxable Services under Section 68(2) of the Finance Act w.e.f 01-01-2005

          The Central Government, vide Notification No. 36/2004-ST; w.e.f. 01-01-2005, issued in exercise of powers conferred under Section 68(2) of the Finance Act, specified various services for the purpose of said section. The relevant extracts of the said notification is given here-in-below:

         

          In exercise of powers conferred by sub-section (2) of Section 68 of the Finance Act, 1994(32 of 1994), the Central Government, hereby notifies, the following taxable services for the purpose of the said sub-section, namely:-

                                                  

(A)…………………………………………………………………………………………………………………………………………………………(B) any taxable service provided by a person who is non-resident or is from outside India, does not have any office in India”

 

          Insertion of Explanation in Section 65(105) of the Finance Act w.e.f. 16-06-2005

          As apparent from the extracts inserted in rule 2(1)(d) [supra], the term non-resident used in it is not a legally defined term, although commonly it may be construed to mean an Indian who for the time being resides abroad, but a strict interpretation would make it applicable to any person, be a foreign national or an Indian, not residing in India. Also the term “from outside India” implied that the service provider must have come to India for providing taxable service in India. It was also possible to give the phrase a varying interpretation as referring to a person who provided the taxable service was outside India. Subsequently to clarify the ambiguities of Rule 2(1)(d)(iv), an explanation was inserted to Section 65(105) by the Finance Act, 2005 w.e.f 16-06-2005, which read as follows:

 

          “Explanation: for 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.”

 

 

                         

          Section 66A- Inserted by Finance Act, 2006

          The Finance Act, 2006 inserted Section 66A w.e.f 18-04-2006, which elaborated on the chargeability of service tax on services received from outside India. In this context, the Government also introduced the new set of Rules, namely, Taxability of Services (Provided from Outside India and Received in India) Rules, 2006 vide Notification No. 11/2006-ST dated 19-04-2006.

(Consequential amendments were also carried out in Rule 2(1)(d)(iv) of SERVICE TAX RULES, 94 and the aforesaid Explanation to Sec.65(105) was withdrawn).

 

Issue under reference:

 

          Under the backdrop of aforesaid legal provisions, the issue under reference is the period from which service recipient should be made liable to pay service tax for services provided by the non-resident or any other person from outside India, not having office in India, i.e., whether liability to pay tax on foreign services received by service recipients comes into effect - 

(i)      From the date of insertion sub-clause (iv) to Rule 2(1) (d), viz. 16th August, 2002, or

(ii)     From the date of introduction of Notification No. 36/2004, viz. 01st January, 2005.

 

It would first be worthwhile to examine the relevant provisions of existing Section 68(1) and 68(2) of the Finance Act, which is reproduced here-in-below:

 

                   Payment of service tax.

                   (1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.

                   (2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Govt. in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service”

                                                                                                            [Emphasis Added]

 

          On perusal of the aforesaid provision, it can be seen that for the purpose of Section 68(2), it would be necessary for the Government to:

          (i)           Notify the Taxable Service

(ii)          Prescribe the person who shall pay the service tax with respect of services notified for the purpose of Section 68(2) and the manner in which such tax would be payable such person.

 

Let us now try to analyse the rationale behind the introduction of Section 68(2) of the Finance Act. Prior to 16-10-1998, Section 68 had four sub-sections viz. (1), (1A), (2) and (3). Section 68(1) provided that the service provider shall collect the service tax.  Section 68(1A) provided that as regards some of the categories of services out of the list of taxable services specified in the Act, e.g. services provided by Goods Transport Agency (GTA) and Clearing and Forwarding Agents (C&F Agents), couriers, consulting engineers, tour operators etc., the service tax for such services shall be collected from such person and in such manner as may be prescribed, and such person shall be treated as the person responsible for collecting the service tax. Sub-sections (3) and (4) provided that such service tax should be deposited to the government by the person responsible for collection, irrespective of whether he has collected it or not. In order to give effect to the provision under section 68(1A), Rule 2(1)(d) defined the term ‘Person responsible for collecting of service tax’, specifying the services where persons other than the service provider would be liable to collect the service tax. In such Rules, the service recipient was made liable for payment of service tax in respect of services under the categories of GTA and C&F Agents. It is important to note that the provisions regarding payment of service tax by persons other than the service provider were made applicable to certain categories of service and not on the basis of whether the service was provided from outside India or from within India. Hence there was no mention of foreign service provider in the then Rule 2(1)(d).

 

          Meanwhile, in 1999, the Supreme Court in the case of Laghu Udyog Bharati vs. UOI, [112 ELT 365]] observed that the imposition of tax was always on the person rendering service, and only the person providing the service could be regarded as an assessee, and not the customer, and hence Service Tax Rulesuck down the provisions contained in Rule 2(1)(d)(xii) and (xvii)(relating to services provided by GTA and C&F Agents) as ultra vires the Act itself. 

 

Consequent to the aforesaid decision, the Government re-cast the provisions of Section 68, by Finance Act, 1998, with effect from 16-10-1998 so as to incorporate a specific provision empowering the government to designate persons other than service providers as the person responsible for paying the service tax. Accordingly, the section was substituted by a new section 68 where sub-section (1) provided for payment of service tax by the service provider and section 68(2) provided for cases (as notified) where a person other than the service provider would be liable to pay service tax. Section 68(2) has been worded significantly to the effect that collection of tax has been replaced by payment of tax. It means that even if the assessee is not able to collect the tax, he shall be liable to make the payment for service tax. Consequently, earlier Rule 2(1)(d) was substituted by the Service Tax (Amendment Rules) Rules, 1998, w..e.f. 16-10-1998, to provide for definition of ‘Person liable for paying service tax’ instead of ‘Person responsible for collecting the service tax’.

 

From the aforesaid analysis, it may be deduced that the mandate to provide for  Rules defining “the person liable for paying the service tax” was granted by Section 68 of the Act. In other words, it may be said that in order to give effect to the provisions of said section, Rule 2(1)(d) was enacted and same was amended from time to time.

 

Subsequently, vide Notification No. 12/2002 dated 01-08-2002, the Government, in exercise of the powers conferred by Section 94(1) and (2) of the Act, further amended the definition of ‘Person liable for paying the service tax’ contained in Rule 2(1)(d) by insertion of sub-clause (iv), which provides that in relation to services provided by a person who is a non-resident, or is from outside India and who does not have any office in India, the person liable for paying the service tax would be the person receiving the taxable service in India. In this respect, it needs to be mentioned that Section 94(2) of the Act empowers the Central Government to notify rules in respect of collection and recovery of service tax under Sections 66 and 68. Hence, it may be said that vide said Notification, the Central Government prescribed the person who shall be liable to pay the service tax with respect to the taxable services provided by the foreign service provider, not having any office in India.

 

In a subsequent Notification No.36/2004-ST dated 31-12-2004 issued in exercise of the powers conferred by Section 68(2), the services for the purpose of the said sub-section was notified w.e.f. 01-01-2005. These notified services included the services provided by Goods Transport Agencies as well as ‘any taxable services provided by a person who is non-resident or is from outside India, does not have any office in India’. Rule 2(1)(d) was also amended correspondingly w.e.f. 01-01-2005 vide Notification No.35/2004-ST dated 03-12-2004, whereby clause (v) was inserted in Rule 2(1)(d) to provide that in case of GTA service, the person liable to pay service tax will be the payer of the freight. It is significant to note that such corresponding amendment was made in Rule 2(1)(d)(v) only in respect of GTA service and not in respect of foreign service provider since such provision regarding liability on the recipient of service, was already existing in Rule 2(1)(d)(iv) w.e.f.. 01-08-2002 vide Notification No.12/2002 (supra).  

 

If we take a look at all the above facts and provisions of law that have evolved from time to time, it would seem that there is scope of argument for either of the views. These are summarised below:

 

Case for commencement of liability from 01-01-2005

 

Notification No. 12/2002 (supra) cannot be construed to have notified the taxable services under Section 68(2) of the Act in as much as the main objective of the aforesaid notification was to amend Rule 2(d) and prescribe the person who shall be liable to pay the service. It was only on 31-12-2004, when the Government vide Notification No. 32/2004, issued under Section 68(2), notified the services for the purpose of section 68(2). Clause B of the said notification provides that the taxable services for the purpose of Section 68(2) shall be ‘any taxable services provided by the person who is non-resident or is from outside India, not having any office in India”. Hence, it be argued that only after 31-12-2004, the liability to pay service tax would arise in the hands of the recipients of foreign service.

 

In this respect, reference may further be made to the decision of the Hon’ble Tribunal in the case of Aditya Cement vs CCE, Jaipur-II [2007 (7) S.T.R. 153 (Tri- Del)], wherein it has been held that in case import of services, i.e. services received from a non-residents, service receiver cannot be made liable to pay tax in respect of such services for the period prior to 01-01-2005. In this decision, the Hon’ble Tribunal has drawn similar conclusions as indicated above. The relevant extracts of the judgment are reproduced here-in-below:

 

                        “It can be seen from the above reproduced rule [Rule 2(1)(d)] that it was in context of the definition of “Person liable for paying the service tax”. This provision in itself may not suffice revenue to direct the appellant to discharge the service tax liability as service receiver, on the face of the fact that notification under Section 68(2) of the Finance Act, 1994, was issued by the Central Government only on 31-12-2004. If the contention of the learned SDR is accepted, then there was no necessity for the Government to issue Notification No. 36/2004 notifying the service receiver from non-resident having no office, to pay service tax, as receiver. By issuing the said notification, the Central Government intended to tax the service receiver from non-resident, with effect from 01-01-2005, which, in corollary by so, then the amount so paid by the appellant is not a tax, which the revenue cannot keep it.”

 

The Tribunal further held that the Rules are subservient to the Sections and if the section does not provide for the discharge of tax by recipient of services from non-resident having no office, then it would be a futile exercise to rely upon the rules to collect the tax.

 

Further in the case of Ispat Industries Ltd vs CCE, Raigad [2007 (8) S.T.R. 282 (Tri. - Mumbai)] similar views have been expressed and it has been held that for period prior to 1-1-2005, service receiver was not liable to pay the Service tax for services from non-resident service provider and any amount paid as tax inadvertently is liable to be refunded to appellants. The extract of judgement is reproduced here-in-below:

 

“It can be seen from the above-reproduced rule that it was in context of the definition of “person liable for paying the Service Tax”. This provision in itself may not suffice revenue to direct the appellant to discharge the service tax liability as service receiver, on the face of the fact that notification under Section 68(2) of the Finance Act, 1994, was issued by the Central Government only on 31-12-2004. If the contention of the learned SDR is to be accepted, then there was no necessity for the Government to issue Notification No. 36/2004-S.T. notifying the Service receiver from non-resident having no office, to pay Service tax, as receiver. By issuing the said Notification, Central Government intended to tax the service receiver from non-resident, with effect from 1-1-2005, which, in corollary would be that no Service tax is payable by this category prior to 1-1-2005. If that by so, then the amount paid by the appellant is not a tax, which the revenue cannot keep with it.”

 

In view of the aforesaid, it may be possible to take a view that since, for the purposes of Section 68(2), the Central Government has notified “any taxable service” provided by the foreign service provider only w.e.f 01-02-05, no service tax may be payable for the period from 16th August, 2002 (i.e. date from which Notification 12/2002 came into force) till 31-12-2004.

 

Case for commencement of liability from 16-08-2002

If the evolution of legislation in regard to levy of service tax on services received from foreign service providers is analysed, it does not seem that it was ever the legislative intent to keep such service outside the purview of service tax.. Earlier also, i.e. prior to the introduction of Rule 2(1)(d)(iv), the second proviso to Rule 6(1) of the SERVICE TAX RULES, 94 contained provisions on similar lines as Rule 2(1)(d)(iv), the difference only being that the said proviso made either non-resident himself or his authorised agent in India, liable to pay service tax. Even at that time, Section 68(2) of the Act stood as it existed after 16-08-2002. At no point of time, till then, it was ever disputed that the said proviso was a mere mechanism which prescribed only the person liable to pay tax service tax and Government had not yet notified the taxable services in respect of non-residents. In fact, there are several judgments in this context, wherein, it has been held that prior to 16-08-2002, service tax liability in respect of services received from non-residents would cast on agents and only after introduction of Rule 2(1)(d)(iv), w.e.f. 16-08-2002, service recipients would be liable for service tax. Some of the decisions are cited here-in-below:

 

·            Cadbury India Ltd. vs CCE, [2005(188) E.L.T. 166]

·            Bajaj Auto Ltd. vs Comm., [2005 (179) E.L.T. 481 (T)]

·            Kerala State Electricity Board vs CCE, [2005(187) E.L.T. 111]

·            M & B Footwear (P) Ltd. vs. Commissioner of C. Ex., [2006(2) S.T.R. 46(Tri.-Del.)]

·             Jubilant Organosys Ltd. vs. Commissioner of C. Ex., [2006(3) S.T.R. 493(Tri.-Del.)]

 

          While agreeing that the aforesaid judgments did not specifically deal with the question whether the recipient of service would be liable in spite of absence of any notification being issued under section 68(2), the fact remains that these decisions mainly dealt with cases where services had been rendered by foreign service providers before 01-01-2005 and it was held in all cases that the recipient was not liable in respect of services rendered before 16-08-2002 and was so liable only in respect of services rendered from 16-08-2002 onwards.

 

Since Rule 2(1)(d)(iv) came into being by Notification No.12/2002 (supra) in exercise of powers conferred by section 94 of the Act which grants powers to the Central Government to make rules to effect the collection and recovery of tax under Section 66 and 68 of the Act, Rule 2(1)(d)(iv) cannot be said to devoid of any statutory power till 31-12-2004 even though such power was not conferred by section 68(2).

 

Rule 2(1)(d)(iv) states that in respect of  taxable service provided by a person who is a non-resident or is outside India, having no office in India, the person liable for paying the service tax would be the service recipient. The expression ‘taxable service provided by a person’ may be said to cover within its ambit all the services defined in Section 65(105) of the Act as on that date and hence any of the said taxable service provided by non-residents would fall within the expression ‘ notified taxable services’ mentioned in Section 68(2) of the Act.  

 

As regards the specific mention of services rendered by non-residents in Clause B of the Notification No. 36/2004 (supra), it may be said that the same was just to clarify the position and remove doubts about its coverage. This is more so because services rendered by non-residents cannot really be a category of service to be notified. It can be any category of taxable services that is rendered by foreign service providers.

 

Conclusion :

 

In view of the aforesaid, it may been seen that issue is not free from doubt and may favour either way, depending upon the interpretations of the aforesaid provisions the Courts would make in this regard. However in case of ongoing  litigations pertaining to liability of assessee in capacity of service recipient prior to 01-01-2005, resort could be had to the judgments of Aditya Cement and Ispat Industries [supra], whatever be the nature of dispute and issues involved. Moreover, as per decision of Ispat Industries it is possible to apply for refund of tax paid in capacity of recipient before 01-01-2005.

 

It seems that the legislative machinery did fail to provide for an unambiguous and clear legal portrait of its intentions to make the service recipient liable to tax. The legislative intent cannot be doubted, but the legislative casting of the intent was ambiguous and the entire controversy seems attributable to the drafting lacuna.

 

 

 

Supreme Kothari

CA Final Student

Registration no: ERO 0104574

 

Liability of Service Recipient

An overview

 

          The birth of Import of Services under the Finance Act, 1994 has been rather a silent incursion. The liability imposed on the receiver of a taxable service, in certain cases, where the provider of taxable service is outside India is termed as “import of service. It is now abundantly clear that import of taxable service from outside India attracts service tax and in that respect the liability has been specifically cast on the recipient of service receiving service in India. In order to examine the scope of liability of service recipient to discharge service tax on service provided by the non-residents, the relevant provisions of Finance Act, 1994 as amended (here-in-after referred to as Act), Service Tax Rules, 1994 (in short SERVICE TAX RULES, 94), etc, as it stood from time to time are enumerated here-in-below for ease of reference:

 

          From February, 1999 -15th August, 2002:

         

          In February, 1999, vide Notification no. 1/1999-ST dated 28-02-1999, a second proviso was inserted to Rule 6 of Service Tax Rules, 1994 to provide that when taxable service is provided by a non-resident, the liability to pay service tax will be on the non-resident or any person authorised by him on his behalf. The relevant extracts of the said notification is given here-in-below for reference:

         

               Rule 6- “Provided further that, in case of a person who is non-resident or is from outside India, does not have any office in India and is liable to pay service tax on taxable services provided in India,-

                        (i) the service tax thereon shall be paid by such person or on his behalf by any other person authorised by him, who shall submit to the Commissioner of Central Excise in whose jurisdiction the taxable services have been rendered, a return, containing the following details………………………………………………………………………………………………………………………………………………….”

          Hence, originally the liability was cast on the non-resident or his authorised agent.

 

          From 16th August, 2002

          The aforesaid legislation continued till 16-08-2002, when Rule 2(1)(d) of the SERVICE TAX RULES, 1994 was amended by way of insertion of clause (iv) in the said rule vide Notification No. 12/2002 dated 01-08-2002, whereby, it was provided that in relation to any 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 the taxable service in India, shall be liable to pay service tax. Simultaneously, aforesaid proviso to Rule 6 relating to payment of tax was deleted. New provision read thus:

 

                        “Rule 2(1)(d) “Person liable for paying service tax” means

          (iv) in relation to any 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.”;  

 

          Notified Taxable Services under Section 68(2) of the Finance Act w.e.f 01-01-2005

          The Central Government, vide Notification No. 36/2004-ST; w.e.f. 01-01-2005, issued in exercise of powers conferred under Section 68(2) of the Finance Act, specified various services for the purpose of said section. The relevant extracts of the said notification is given here-in-below:

         

          In exercise of powers conferred by sub-section (2) of Section 68 of the Finance Act, 1994(32 of 1994), the Central Government, hereby notifies, the following taxable services for the purpose of the said sub-section, namely:-

                                                  

(A)…………………………………………………………………………………………………………………………………………………………(B) any taxable service provided by a person who is non-resident or is from outside India, does not have any office in India”

 

          Insertion of Explanation in Section 65(105) of the Finance Act w.e.f. 16-06-2005

          As apparent from the extracts inserted in rule 2(1)(d) [supra], the term non-resident used in it is not a legally defined term, although commonly it may be construed to mean an Indian who for the time being resides abroad, but a strict interpretation would make it applicable to any person, be a foreign national or an Indian, not residing in India. Also the term “from outside India” implied that the service provider must have come to India for providing taxable service in India. It was also possible to give the phrase a varying interpretation as referring to a person who provided the taxable service was outside India. Subsequently to clarify the ambiguities of Rule 2(1)(d)(iv), an explanation was inserted to Section 65(105) by the Finance Act, 2005 w.e.f 16-06-2005, which read as follows:

 

          “Explanation: for 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.”

 

 

                         

          Section 66A- Inserted by Finance Act, 2006

          The Finance Act, 2006 inserted Section 66A w.e.f 18-04-2006, which elaborated on the chargeability of service tax on services received from outside India. In this context, the Government also introduced the new set of Rules, namely, Taxability of Services (Provided from Outside India and Received in India) Rules, 2006 vide Notification No. 11/2006-ST dated 19-04-2006.

(Consequential amendments were also carried out in Rule 2(1)(d)(iv) of SERVICE TAX RULES, 94 and the aforesaid Explanation to Sec.65(105) was withdrawn).

 

Issue under reference:

 

          Under the backdrop of aforesaid legal provisions, the issue under reference is the period from which service recipient should be made liable to pay service tax for services provided by the non-resident or any other person from outside India, not having office in India, i.e., whether liability to pay tax on foreign services received by service recipients comes into effect - 

(i)      From the date of insertion sub-clause (iv) to Rule 2(1) (d), viz. 16th August, 2002, or

(ii)     From the date of introduction of Notification No. 36/2004, viz. 01st January, 2005.

 

It would first be worthwhile to examine the relevant provisions of existing Section 68(1) and 68(2) of the Finance Act, which is reproduced here-in-below:

 

                   Payment of service tax.

                   (1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.

                   (2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Govt. in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service”

                                                                                                            [Emphasis Added]

 

          On perusal of the aforesaid provision, it can be seen that for the purpose of Section 68(2), it would be necessary for the Government to:

          (i)           Notify the Taxable Service

(ii)          Prescribe the person who shall pay the service tax with respect of services notified for the purpose of Section 68(2) and the manner in which such tax would be payable such person.

 

Let us now try to analyse the rationale behind the introduction of Section 68(2) of the Finance Act. Prior to 16-10-1998, Section 68 had four sub-sections viz. (1), (1A), (2) and (3). Section 68(1) provided that the service provider shall collect the service tax.  Section 68(1A) provided that as regards some of the categories of services out of the list of taxable services specified in the Act, e.g. services provided by Goods Transport Agency (GTA) and Clearing and Forwarding Agents (C&F Agents), couriers, consulting engineers, tour operators etc., the service tax for such services shall be collected from such person and in such manner as may be prescribed, and such person shall be treated as the person responsible for collecting the service tax. Sub-sections (3) and (4) provided that such service tax should be deposited to the government by the person responsible for collection, irrespective of whether he has collected it or not. In order to give effect to the provision under section 68(1A), Rule 2(1)(d) defined the term ‘Person responsible for collecting of service tax’, specifying the services where persons other than the service provider would be liable to collect the service tax. In such Rules, the service recipient was made liable for payment of service tax in respect of services under the categories of GTA and C&F Agents. It is important to note that the provisions regarding payment of service tax by persons other than the service provider were made applicable to certain categories of service and not on the basis of whether the service was provided from outside India or from within India. Hence there was no mention of foreign service provider in the then Rule 2(1)(d).

 

          Meanwhile, in 1999, the Supreme Court in the case of Laghu Udyog Bharati vs. UOI, [112 ELT 365]] observed that the imposition of tax was always on the person rendering service, and only the person providing the service could be regarded as an assessee, and not the customer, and hence Service Tax Rulesuck down the provisions contained in Rule 2(1)(d)(xii) and (xvii)(relating to services provided by GTA and C&F Agents) as ultra vires the Act itself. 

 

Consequent to the aforesaid decision, the Government re-cast the provisions of Section 68, by Finance Act, 1998, with effect from 16-10-1998 so as to incorporate a specific provision empowering the government to designate persons other than service providers as the person responsible for paying the service tax. Accordingly, the section was substituted by a new section 68 where sub-section (1) provided for payment of service tax by the service provider and section 68(2) provided for cases (as notified) where a person other than the service provider would be liable to pay service tax. Section 68(2) has been worded significantly to the effect that collection of tax has been replaced by payment of tax. It means that even if the assessee is not able to collect the tax, he shall be liable to make the payment for service tax. Consequently, earlier Rule 2(1)(d) was substituted by the Service Tax (Amendment Rules) Rules, 1998, w..e.f. 16-10-1998, to provide for definition of ‘Person liable for paying service tax’ instead of ‘Person responsible for collecting the service tax’.

 

From the aforesaid analysis, it may be deduced that the mandate to provide for  Rules defining “the person liable for paying the service tax” was granted by Section 68 of the Act. In other words, it may be said that in order to give effect to the provisions of said section, Rule 2(1)(d) was enacted and same was amended from time to time.

 

Subsequently, vide Notification No. 12/2002 dated 01-08-2002, the Government, in exercise of the powers conferred by Section 94(1) and (2) of the Act, further amended the definition of ‘Person liable for paying the service tax’ contained in Rule 2(1)(d) by insertion of sub-clause (iv), which provides that in relation to services provided by a person who is a non-resident, or is from outside India and who does not have any office in India, the person liable for paying the service tax would be the person receiving the taxable service in India. In this respect, it needs to be mentioned that Section 94(2) of the Act empowers the Central Government to notify rules in respect of collection and recovery of service tax under Sections 66 and 68. Hence, it may be said that vide said Notification, the Central Government prescribed the person who shall be liable to pay the service tax with respect to the taxable services provided by the foreign service provider, not having any office in India.

 

In a subsequent Notification No.36/2004-ST dated 31-12-2004 issued in exercise of the powers conferred by Section 68(2), the services for the purpose of the said sub-section was notified w.e.f. 01-01-2005. These notified services included the services provided by Goods Transport Agencies as well as ‘any taxable services provided by a person who is non-resident or is from outside India, does not have any office in India’. Rule 2(1)(d) was also amended correspondingly w.e.f. 01-01-2005 vide Notification No.35/2004-ST dated 03-12-2004, whereby clause (v) was inserted in Rule 2(1)(d) to provide that in case of GTA service, the person liable to pay service tax will be the payer of the freight. It is significant to note that such corresponding amendment was made in Rule 2(1)(d)(v) only in respect of GTA service and not in respect of foreign service provider since such provision regarding liability on the recipient of service, was already existing in Rule 2(1)(d)(iv) w.e.f.. 01-08-2002 vide Notification No.12/2002 (supra).  

 

If we take a look at all the above facts and provisions of law that have evolved from time to time, it would seem that there is scope of argument for either of the views. These are summarised below:

 

Case for commencement of liability from 01-01-2005

 

Notification No. 12/2002 (supra) cannot be construed to have notified the taxable services under Section 68(2) of the Act in as much as the main objective of the aforesaid notification was to amend Rule 2(d) and prescribe the person who shall be liable to pay the service. It was only on 31-12-2004, when the Government vide Notification No. 32/2004, issued under Section 68(2), notified the services for the purpose of section 68(2). Clause B of the said notification provides that the taxable services for the purpose of Section 68(2) shall be ‘any taxable services provided by the person who is non-resident or is from outside India, not having any office in India”. Hence, it be argued that only after 31-12-2004, the liability to pay service tax would arise in the hands of the recipients of foreign service.

 

In this respect, reference may further be made to the decision of the Hon’ble Tribunal in the case of Aditya Cement vs CCE, Jaipur-II [2007 (7) S.T.R. 153 (Tri- Del)], wherein it has been held that in case import of services, i.e. services received from a non-residents, service receiver cannot be made liable to pay tax in respect of such services for the period prior to 01-01-2005. In this decision, the Hon’ble Tribunal has drawn similar conclusions as indicated above. The relevant extracts of the judgment are reproduced here-in-below:

 

                        “It can be seen from the above reproduced rule [Rule 2(1)(d)] that it was in context of the definition of “Person liable for paying the service tax”. This provision in itself may not suffice revenue to direct the appellant to discharge the service tax liability as service receiver, on the face of the fact that notification under Section 68(2) of the Finance Act, 1994, was issued by the Central Government only on 31-12-2004. If the contention of the learned SDR is accepted, then there was no necessity for the Government to issue Notification No. 36/2004 notifying the service receiver from non-resident having no office, to pay service tax, as receiver. By issuing the said notification, the Central Government intended to tax the service receiver from non-resident, with effect from 01-01-2005, which, in corollary by so, then the amount so paid by the appellant is not a tax, which the revenue cannot keep it.”

 

The Tribunal further held that the Rules are subservient to the Sections and if the section does not provide for the discharge of tax by recipient of services from non-resident having no office, then it would be a futile exercise to rely upon the rules to collect the tax.

 

Further in the case of Ispat Industries Ltd vs CCE, Raigad [2007 (8) S.T.R. 282 (Tri. - Mumbai)] similar views have been expressed and it has been held that for period prior to 1-1-2005, service receiver was not liable to pay the Service tax for services from non-resident service provider and any amount paid as tax inadvertently is liable to be refunded to appellants. The extract of judgement is reproduced here-in-below:

 

“It can be seen from the above-reproduced rule that it was in context of the definition of “person liable for paying the Service Tax”. This provision in itself may not suffice revenue to direct the appellant to discharge the service tax liability as service receiver, on the face of the fact that notification under Section 68(2) of the Finance Act, 1994, was issued by the Central Government only on 31-12-2004. If the contention of the learned SDR is to be accepted, then there was no necessity for the Government to issue Notification No. 36/2004-S.T. notifying the Service receiver from non-resident having no office, to pay Service tax, as receiver. By issuing the said Notification, Central Government intended to tax the service receiver from non-resident, with effect from 1-1-2005, which, in corollary would be that no Service tax is payable by this category prior to 1-1-2005. If that by so, then the amount paid by the appellant is not a tax, which the revenue cannot keep with it.”

 

In view of the aforesaid, it may be possible to take a view that since, for the purposes of Section 68(2), the Central Government has notified “any taxable service” provided by the foreign service provider only w.e.f 01-02-05, no service tax may be payable for the period from 16th August, 2002 (i.e. date from which Notification 12/2002 came into force) till 31-12-2004.

 

Case for commencement of liability from 16-08-2002

If the evolution of legislation in regard to levy of service tax on services received from foreign service providers is analysed, it does not seem that it was ever the legislative intent to keep such service outside the purview of service tax.. Earlier also, i.e. prior to the introduction of Rule 2(1)(d)(iv), the second proviso to Rule 6(1) of the SERVICE TAX RULES, 94 contained provisions on similar lines as Rule 2(1)(d)(iv), the difference only being that the said proviso made either non-resident himself or his authorised agent in India, liable to pay service tax. Even at that time, Section 68(2) of the Act stood as it existed after 16-08-2002. At no point of time, till then, it was ever disputed that the said proviso was a mere mechanism which prescribed only the person liable to pay tax service tax and Government had not yet notified the taxable services in respect of non-residents. In fact, there are several judgments in this context, wherein, it has been held that prior to 16-08-2002, service tax liability in respect of services received from non-residents would cast on agents and only after introduction of Rule 2(1)(d)(iv), w.e.f. 16-08-2002, service recipients would be liable for service tax. Some of the decisions are cited here-in-below:

 

·            Cadbury India Ltd. vs CCE, [2005(188) E.L.T. 166]

·            Bajaj Auto Ltd. vs Comm., [2005 (179) E.L.T. 481 (T)]

·            Kerala State Electricity Board vs CCE, [2005(187) E.L.T. 111]

·            M & B Footwear (P) Ltd. vs. Commissioner of C. Ex., [2006(2) S.T.R. 46(Tri.-Del.)]

·             Jubilant Organosys Ltd. vs. Commissioner of C. Ex., [2006(3) S.T.R. 493(Tri.-Del.)]

 

          While agreeing that the aforesaid judgments did not specifically deal with the question whether the recipient of service would be liable in spite of absence of any notification being issued under section 68(2), the fact remains that these decisions mainly dealt with cases where services had been rendered by foreign service providers before 01-01-2005 and it was held in all cases that the recipient was not liable in respect of services rendered before 16-08-2002 and was so liable only in respect of services rendered from 16-08-2002 onwards.

 

Since Rule 2(1)(d)(iv) came into being by Notification No.12/2002 (supra) in exercise of powers conferred by section 94 of the Act which grants powers to the Central Government to make rules to effect the collection and recovery of tax under Section 66 and 68 of the Act, Rule 2(1)(d)(iv) cannot be said to devoid of any statutory power till 31-12-2004 even though such power was not conferred by section 68(2).

 

Rule 2(1)(d)(iv) states that in respect of  taxable service provided by a person who is a non-resident or is outside India, having no office in India, the person liable for paying the service tax would be the service recipient. The expression ‘taxable service provided by a person’ may be said to cover within its ambit all the services defined in Section 65(105) of the Act as on that date and hence any of the said taxable service provided by non-residents would fall within the expression ‘ notified taxable services’ mentioned in Section 68(2) of the Act.  

 

As regards the specific mention of services rendered by non-residents in Clause B of the Notification No. 36/2004 (supra), it may be said that the same was just to clarify the position and remove doubts about its coverage. This is more so because services rendered by non-residents cannot really be a category of service to be notified. It can be any category of taxable services that is rendered by foreign service providers.

 

Conclusion :

 

In view of the aforesaid, it may been seen that issue is not free from doubt and may favour either way, depending upon the interpretations of the aforesaid provisions the Courts would make in this regard. However in case of ongoing  litigations pertaining to liability of assessee in capacity of service recipient prior to 01-01-2005, resort could be had to the judgments of Aditya Cement and Ispat Industries [supra], whatever be the nature of dispute and issues involved. Moreover, as per decision of Ispat Industries it is possible to apply for refund of tax paid in capacity of recipient before 01-01-2005.

 

It seems that the legislative machinery did fail to provide for an unambiguous and clear legal portrait of its intentions to make the service recipient liable to tax. The legislative intent cannot be doubted, but the legislative casting of the intent was ambiguous and the entire controversy seems attributable to the drafting lacuna.

 

 

 

Supreme Kothari

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Registration no: ERO 0104574

 

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