M/s. XYZ India Pvt. Ltd (100% subsidiary of a MNC) receives commission Income from the MNC (Parent Company) on account of booking orders in India. The Indian Company also carries out other ancillary business activities for successful procurement of orders. All the payments are received in Foreign Currency only.
By this article, we are expressing our opinion on service tax liability on commission received by Indian Company after Introduction of Negative List concept from 1st July 2012 and onwards.
In the new system of levy of Service Tax, all services except those listed in Section 66D or specified in Mega exemption Notification(E/N 25/2012) will be liable to tax subject to other conditions.
First step is to determine whether the said transaction can be regarded as service or not as defined under clause 44 of section 65B. After going through the said provisions it can be concluded that the activity of booking orders performed by the Indian company for its parent company will be regarded as service.
· Taxable Territory
Further as per the new charging section (Section 66B) the service should be provided or agreed to be provided by a person to another in the taxable territory to come into the ambit of Service Tax.
In our transaction, service provider is situated in taxable territory itself.
· Negative List
The activity of selling goods on behalf of parent company on commission basis is not covered in the Negative List.
· Mega Exemption Notification
39 activities are listed in the Mega Exemption Notification. The activity under consideration does not find place among the 39 activities specified therein.
Therefore, from the above discussion it can be concluded that in our transaction:
1. A service is involved.
2. Service Provider is in Taxable Territory.
3. It is not covered in negative list or in Mega Exemption Notification.
Further, the company is engaged in activity of providing services to the parent company which is located outside Indian Territory. Hence the taxability of the said service will be governed by the Place of Provision Rules, 2012(w.e.f. 01/07/12 replaced Export of Services Rules, 2005).
Service Tax is a consumption based tax. According to this principle exports are not charged to tax as consumption is elsewhere whereas on other hand imports are taxable. This principle is applied universally.
As mentioned earlier, inter-alia a service is taxable only when it is provided in the taxable territory (Section 66B). It was also concluded earlier that our service provider is situated in taxable territory only.
· Place of Provision Rules, 2012
Our activity, prima-facie is covered under Rule 3 and Rule 4 of the said rules.
Rule 3: Location of Service Receiver
This rule applies only when none of the other rule applies. In other words, it is a default rule, which provides location of service receiver as place of provision of service. It will be the key determining factor to ascertain the taxability of the activity.
Rule 4: Place of Provision for performance based services
This rule applies when goods temporarily come into the physical possession of the provider of the service, without which it becomes impossible to render the service.
In our transaction under review this is not the case. We are only and only procuring orders for are parent company. This rule applies for example in case of repair and maintenance service etc.
Further as per Rule 9 for some of the specified services location of service provider is the place of provision of service. Our activity is also not covered in those specified services.
Therefore, reliance has been placed on default rule i.e. Rule 3. According to which the place of provision of service would be the location of the service receiver. Since the parent company is located outside the taxable territory, the activity would be outside the ambit of service tax.
As the MNC is located outside the taxable territory, the said activity qualifies as an export and hence not taxable in India.
Disclaimer: Although every precaution has been taken in writing the article. Author will not be responsible for any damage or loss in whatever manner consequent to any action taken on the basis of any content of this Article.
By: Ankit Gupta and team