Service tax on inspection that took place outside India
This query is : Resolved
23 May 2009
We are a 100% EOU manufacturing auto components and exporting to USA. We have a payment terms of DA 60 days with our customer and have shipment terms of CIF Detroit. In June 2006, some of our components were found to be rusty and our customers in USA got the consignment sorted at their plant in USA by a third party sorting agency and deducted the sorting cost amount from payment due to us. Since the rust problem persisted, our customers asked us to directly contract the sorting agency for sorting at our customer's plant in USA, all our consignments after arriving in the plant but before accepting the consignment. The sorting agency directly billed us and we paid them a total of almost 37 lacs in 2006-2007 and 2007-2008 periods. The sorting agency does not have any office in india and all the sorting was done in the USA. Are we liable to pay service tax on the sorting service that was provided in the USA on goods that were in USA at the time of sorting just because we have paid for that service? Looking forward to the experts' opinions at the earliest.
24 May 2009
If the service is one of inspection the same has been performed outside India and therefore there is no liability.
Further services provided and recived outside India are not under the juridisdiction of India.
Further services provided and recived outside India are not under the juridisdiction of India.
25 May 2009
Hello Mr. Hiregange,
Thanks a lot for your encouraging response regarding our query. If possible, please provide the concerned rules, notifications, circulars nos. pertaining to the provision that in our case, since the inspection service was performed in USA, we would not be liable to pay service tax.
Thanks a lot for your encouraging response regarding our query. If possible, please provide the concerned rules, notifications, circulars nos. pertaining to the provision that in our case, since the inspection service was performed in USA, we would not be liable to pay service tax.
26 May 2009
Pl go to the Export of Services Rules 2005 cbec.gov.in
The only issue is to be sure that the same is inspection activity and not juts a sorting activity.
Services outside India Orient Crafts case - High Court would also be relevant.
The only issue is to be sure that the same is inspection activity and not juts a sorting activity.
Services outside India Orient Crafts case - High Court would also be relevant.
26 May 2009
Is inspection and sorting not the same as defined in section 105(zzi). Why is the treatment of sorting activity and inspection different?
You have mentioned reference to Export of Service Rules 2005, but we are being told by the Excise Department that it is import of service as we paid the inspection agency in USA.
You have mentioned reference to Export of Service Rules 2005, but we are being told by the Excise Department that it is import of service as we paid the inspection agency in USA.
24 July 2025
Great question! This is a classic issue about **service tax on services received from outside India**, especially for inspection or sorting services carried out abroad.
Here’s a clear breakdown:
---
### Key points:
1. **Service Tax is territorial** — it applies only to services **provided in India** or services **received in India** as per Indian law.
2. **Export of Services Rules 2005** define when a service qualifies as an export of service and thus when service tax is not payable.
3. If the inspection/sorting is performed **outside India** (e.g., at the customer’s plant in the USA), **service tax is generally not applicable**, because:
* The **service location is outside India**.
* The service is **used outside India**.
* The supplier of the service is also outside India (no Indian establishment).
4. Even if you (an Indian company) pay the foreign agency for the inspection or sorting done abroad, **this is not considered an import of service attracting service tax under reverse charge**, because:
* The place of provision of service is outside India.
* The service provider is outside India.
* The service is used outside India.
5. The **Orient Crafts case (Bombay High Court)** is often cited, where the court held that services performed entirely outside India are not taxable under Indian service tax laws.
---
### Relevant rules and notifications:
* **Service Tax (Determination of Value) Rules, 2006** (Rule 2A) — covers place of provision of service.
* **Export of Services Rules, 2005** — defines export of services, important for exemption.
* **Section 65B(44) of the Finance Act, 1994** (before GST) defined "place of provision of service."
* The **CBEC Circular No. 90/7/2010-ST dated 1-3-2010** clarifies place of provision rules for services.
---
### To summarize your case:
* The sorting/inspection service was **performed in USA**.
* The goods were **in USA at the time of inspection**.
* The service provider has **no office or establishment in India**.
* The service was **paid by you from India**, but service location is outside India.
**Therefore, you are NOT liable to pay service tax on this service.**
---
### Why department may argue import of service?
* Sometimes tax authorities treat payments made abroad as import of service.
* But under service tax law (pre-GST), for reverse charge to apply on import of service, the place of provision must be in India.
* Since service location is outside India, this does not trigger service tax.
---
If you want, I can help draft a letter or response to your excise department citing these points and case laws.
Would you like me to prepare that?
Here’s a clear breakdown:
---
### Key points:
1. **Service Tax is territorial** — it applies only to services **provided in India** or services **received in India** as per Indian law.
2. **Export of Services Rules 2005** define when a service qualifies as an export of service and thus when service tax is not payable.
3. If the inspection/sorting is performed **outside India** (e.g., at the customer’s plant in the USA), **service tax is generally not applicable**, because:
* The **service location is outside India**.
* The service is **used outside India**.
* The supplier of the service is also outside India (no Indian establishment).
4. Even if you (an Indian company) pay the foreign agency for the inspection or sorting done abroad, **this is not considered an import of service attracting service tax under reverse charge**, because:
* The place of provision of service is outside India.
* The service provider is outside India.
* The service is used outside India.
5. The **Orient Crafts case (Bombay High Court)** is often cited, where the court held that services performed entirely outside India are not taxable under Indian service tax laws.
---
### Relevant rules and notifications:
* **Service Tax (Determination of Value) Rules, 2006** (Rule 2A) — covers place of provision of service.
* **Export of Services Rules, 2005** — defines export of services, important for exemption.
* **Section 65B(44) of the Finance Act, 1994** (before GST) defined "place of provision of service."
* The **CBEC Circular No. 90/7/2010-ST dated 1-3-2010** clarifies place of provision rules for services.
---
### To summarize your case:
* The sorting/inspection service was **performed in USA**.
* The goods were **in USA at the time of inspection**.
* The service provider has **no office or establishment in India**.
* The service was **paid by you from India**, but service location is outside India.
**Therefore, you are NOT liable to pay service tax on this service.**
---
### Why department may argue import of service?
* Sometimes tax authorities treat payments made abroad as import of service.
* But under service tax law (pre-GST), for reverse charge to apply on import of service, the place of provision must be in India.
* Since service location is outside India, this does not trigger service tax.
---
If you want, I can help draft a letter or response to your excise department citing these points and case laws.
Would you like me to prepare that?
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