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Charging Tax to a foreign company

Shane (Director) (25 Points)

14 January 2011  

Dear All,


I came here hoping someone can help me. We are a VAT registered UK company that provides web hosting. We use an Indian company to provide some equipment (servers) to us.

Now, these servers are all located in the EU. None are in India.

We noticed recently that they started charging us a service tax in September 2010. The percentage of these taxes range from 5% to 13.95%.

When we queried this, we got four different stories, but it comes down to the fact they say they have registered with their local government and have to charge everyone service tax.

 

Now my questions:

1. We are a UK company. Can they charge us a service tax.

2. As none of the servers are actually in India, but in the EU, how can they be providing me a service located in India?

Any comments greatly appreciated.


 7 Replies

CA Sandeep Kumar (Audit Assistant) (804 Points)
Replied 15 January 2011

 

Service provider should be in INdia

Service should be rendered in INDia

Residential status of service recepient does not matter

Current rates are 10.3 % on Invoice amount.. 

In case the invoice amount includes any materials, then no service tax shall be collected on such materials

In your case, if it is only sale of servers (components) to you, then i do not think they can collect service tax. Please write back with more details, will reply

Also, wait for other members to reply

Good day

Suren (CHARTERED ACCOUNTANT) (397 Points)
Replied 15 January 2011

 

13 Export of Services and taxable service used in relation to export of goods.

13.1 What is Export of Services? Whether export of services is exempted from Service Tax?

What constitute export of service is defined in the Export of Service Rules, 2005. The export of taxable services is exempted from Service Tax.

13.2 What constitutes export of services?

The Export of Services, Rules, 2005 specifies 3 categories of cross border transaction of

services and conditions that will be construed as export of services in cases of:

i. Specified services which are provided in relation to immovable properties

situated outside India – [See list of services in Appendix-4] (Refer Rule 3(1)(i) of Export of Service Rules,2005).

ii. Specified services which are partly performed outside India – [See list of

services in Appendix – 4] (Ref. Rule 3(1)(ii) of Export of Service Rules,2005).

iii. the remaining taxable services, barring a few exceptions, when provided in relation to business or commerce, to a recipient located outside India, and when such services are provided not in relation to business or commerce, it should be provided to a recipient located outside India at the time of provision of such service.

However, where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located

outside India. [See list of services in Appendix – 4] (Ref. Rule 3(I)(iii) of Export of Service Rules,2005).

Further condition to be met for treating the provision of any taxable service as export of service -

payment for such service is received by the service provider in convertible

foreign exchange.

[Ref. Rule 3(2) of the Export of Service Rules, 2005].

Thus, each transaction has to be seen individually to ascertain if it constitutes export of services, fulfilling the requisite parameters.

13.3 If export proceeds are received in Indian currency, will it be denied export benefit?

If export proceeds are received in Indian currency, no export benefits shall be available.

[Ref. Rule 3(2)(b) of Export of Service Rules, 2005].

13.4 If a foreign national pays in convertible foreign currency for service received by him in India, and he returns to foreign country, will it be treated as export?

If services are rendered in India, it shall not be treated as export, even if it is rendered to any foreign national and he pays in convertible foreign currency.

[Ref. Rule 3(2)(a) of Export of Service Rules, 2005].

13.5 What are the incentives for export of services?

13.5.1 Taxable services may be exported without payment of service tax, provided the

conditions specified in Export of Service Rules, 2005 are fulfilled.

13.5.2 Where service tax has already been paid on export of services to countries (other than Nepal and Bhutan), rebate/refund of such service tax, can be availed under notification no 11/2005-ST dated 19.4.2005;

13.5.3 Where excise duty / service tax has already been paid on the inputs and input services used in export of services to countries (other than Nepal and Bhutan), rebate/refund of such excise duty on inputs and service tax paid on input services can be availed under notification no. 12/2005- ST dated 19.4.2005;

13.5.4 Where taxable services are exported without payment of tax, but CENVAT Credit was availed, the refund of accumulated CENVAT Credit (if cannot be fully used for payment of service tax), may be claimed as refund under rule 5 of the CENVAT Credit Rules, 2004 read with notification no. 11/2002-CE (N.T.) dated the 1st March, 2002, as amended.

13.6 Whether service tax paid on taxable services used in relation to export of goods, Refundable?

Under Notification No.05/2006-CE(NT) dated 14.03.2006, as amended by Notification No.07/2010-CE(NT) dated 27.02.2010, refund of CENVAT credit is allowed in respect of:

(a) input or input service used in the manufacture of final product which is cleared for export under bond or letter of undertaking;

(b) input or input service used in providing output service which has been exported without payment of service tax,

subject to safeguards, conditions and limitations, as set out in the said notifications.

13.7 Where can one file the rebate claims or refund of unutilized CENVAT Credit?

The rebate claims or refund of utilized CENVAT Credit application has to be filed in the

Central Excise or Service Tax Division/Group where the assessee is registered.

13.8. Where can one file claims for refund of service tax paid on taxable services used by the exporter of goods, allowed under Notification No 17/2009 ST dated 7.7.2009?

The manufacturer-exporter / exporter has to file the claim for refund to the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, having jurisdiction over the factory of manufacture / the registered office or the head office, as the case may be, of such exporter.

Under Notification No.18/2009-ST dated 07.07.2009, the following two services have been exempted, if they are used for export of goods and where the liability to pay the tax on such services is on the exporter himself, on reverse charge basis,-

(i) Transport of goods by road, from the place of removal to any ICD, CFS, port or airport; or from any CFS or ICD to the port or airport; and

(ii) Services provided by a foreign commission agent for procuring orders.

subject to fulfillment of conditions as set out in the said notifications.

Shane (Director) (25 Points)
Replied 20 January 2011

Dear sunny and suren, thank you for your answers.

I've read through the rules suren posted, I'm still a bit unsure so I will explain some more.

I see that there is mention of foreign currency as well: We pay them in USD if that helps.

 

To give some more information about the business:

The Indian company do not own the servers, they act as resellers, so they hire a server on a monthly basis from a EU data centre, we in turn then hire the server from them at a certain cost, and we provide webhosting to our clients.

Now, this is what is confusing me:

In the Export of Services, Rules, 2005 that Suren posted, I see there are 3 reasons to show it is cross border transactions:

 

i. Specified services which are provided in relation to immovable properties

situated outside India


Does this then mean, even though they are situated in India and are technically providing the service in India, it is in relation to immovable properties situated outside India.


Plus we meet the following condition as well:


 

payment for such service is received by the service provider in convertible

foreign exchange.  

We pay in USD.


So therefor, I think we fall under the conditions: 

13.5.1 Taxable services may be exported without payment of service tax, provided the

conditions specified in Export of Service Rules, 2005 are fulfilled.


Does anyone have any comments? This sudden increase of service tax to 13.95% (I thought it was 10.3%?) has made an increase in $90 per product, and this would mean we would run at a loss if we were then not forced to increase our prices. If we cannot resolve this, we'll be pulling out and looking for an alternative supplier.


Thanks all for reading.




K. Kuppuswamy (Consultant) (45 Points)
Replied 03 January 2012

Originally posted by : Suren

 

13 Export of Services and taxable service used in relation to export of goods.

13.1 What is Export of Services? Whether export of services is exempted from Service Tax?

What constitute export of service is defined in the Export of Service Rules, 2005. The export of taxable services is exempted from Service Tax.

13.2 What constitutes export of services?

The Export of Services, Rules, 2005 specifies 3 categories of cross border transaction of

services and conditions that will be construed as export of services in cases of:

i. Specified services which are provided in relation to immovable properties

situated outside India – [See list of services in Appendix-4] (Refer Rule 3(1)(i) of Export of Service Rules,2005).

ii. Specified services which are partly performed outside India – [See list of

services in Appendix – 4] (Ref. Rule 3(1)(ii) of Export of Service Rules,2005).

iii. the remaining taxable services, barring a few exceptions, when provided in relation to business or commerce, to a recipient located outside India, and when such services are provided not in relation to business or commerce, it should be provided to a recipient located outside India at the time of provision of such service.

However, where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located

outside India. [See list of services in Appendix – 4] (Ref. Rule 3(I)(iii) of Export of Service Rules,2005).

Further condition to be met for treating the provision of any taxable service as export of service -

payment for such service is received by the service provider in convertible

foreign exchange.

[Ref. Rule 3(2) of the Export of Service Rules, 2005].

Thus, each transaction has to be seen individually to ascertain if it constitutes export of services, fulfilling the requisite parameters.

13.3 If export proceeds are received in Indian currency, will it be denied export benefit?

If export proceeds are received in Indian currency, no export benefits shall be available.

[Ref. Rule 3(2)(b) of Export of Service Rules, 2005].

13.4 If a foreign national pays in convertible foreign currency for service received by him in India, and he returns to foreign country, will it be treated as export?

If services are rendered in India, it shall not be treated as export, even if it is rendered to any foreign national and he pays in convertible foreign currency.

[Ref. Rule 3(2)(a) of Export of Service Rules, 2005].

13.5 What are the incentives for export of services?

13.5.1 Taxable services may be exported without payment of service tax, provided the

conditions specified in Export of Service Rules, 2005 are fulfilled.

13.5.2 Where service tax has already been paid on export of services to countries (other than Nepal and Bhutan), rebate/refund of such service tax, can be availed under notification no 11/2005-ST dated 19.4.2005;

13.5.3 Where excise duty / service tax has already been paid on the inputs and input services used in export of services to countries (other than Nepal and Bhutan), rebate/refund of such excise duty on inputs and service tax paid on input services can be availed under notification no. 12/2005- ST dated 19.4.2005;

13.5.4 Where taxable services are exported without payment of tax, but CENVAT Credit was availed, the refund of accumulated CENVAT Credit (if cannot be fully used for payment of service tax), may be claimed as refund under rule 5 of the CENVAT Credit Rules, 2004 read with notification no. 11/2002-CE (N.T.) dated the 1st March, 2002, as amended.

13.6 Whether service tax paid on taxable services used in relation to export of goods, Refundable?

Under Notification No.05/2006-CE(NT) dated 14.03.2006, as amended by Notification No.07/2010-CE(NT) dated 27.02.2010, refund of CENVAT credit is allowed in respect of:

(a) input or input service used in the manufacture of final product which is cleared for export under bond or letter of undertaking;

(b) input or input service used in providing output service which has been exported without payment of service tax,

subject to safeguards, conditions and limitations, as set out in the said notifications.

13.7 Where can one file the rebate claims or refund of unutilized CENVAT Credit?

The rebate claims or refund of utilized CENVAT Credit application has to be filed in the

Central Excise or Service Tax Division/Group where the assessee is registered.

13.8. Where can one file claims for refund of service tax paid on taxable services used by the exporter of goods, allowed under Notification No 17/2009 ST dated 7.7.2009?

The manufacturer-exporter / exporter has to file the claim for refund to the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, having jurisdiction over the factory of manufacture / the registered office or the head office, as the case may be, of such exporter.

Under Notification No.18/2009-ST dated 07.07.2009, the following two services have been exempted, if they are used for export of goods and where the liability to pay the tax on such services is on the exporter himself, on reverse charge basis,-

(i) Transport of goods by road, from the place of removal to any ICD, CFS, port or airport; or from any CFS or ICD to the port or airport; and

(ii) Services provided by a foreign commission agent for procuring orders.

subject to fulfillment of conditions as set out in the said notifications.

Alok Agarwal (Partners) (144 Points)
Replied 04 January 2012

No question of chargeability of Service tax in your case. As the receipient is located outside india, it amounts to export of service (category 3 service).

Gaurav Mishra (Management Trainee) (40 Points)
Replied 18 March 2014

Dear All,

We have an urgent query, please guide.

We are an Indian Servcie Provider Company.

We had an agreement with a foreign Company. Pursuant to the agreement, we provided training services to said Foreign company at its indian offices.

Now we have received the fees from its Foreign Office, however, such foreign Company wants to pay Service Tax Component from its Indian office. The Areement is silent on service tax matter.

Is it possible under service tax rules ?? Or should be collect service tax from Foreign Office only ?? Or can we amend the Agreement saying that Fees component shall be paid by Foreign Office and Service Tax component shall be paid by Indian Office of Foreign Company.

 

Waiting for an early response !!

Thanks,

Gaurav

9963647609

 

 


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