Although exports of services were not intended to be taxed from inception, the Export of Services Rules, 2005 (Rules) which were introduced with effect from March 15, 2005, laid down, for the first time, elaborate criteria for the determination of export of services, besides laying down other conditions, so as to qualify for the exemption from the service tax.

The Rules divide all taxable services into three broad categories and provide separate qualifying criteria with respect to each such category of service. In addition, there are two conditions which are to be satisfied by all categories of services, in order to qualify as exports.

These are services that should be provided from India and delivered/used outside India and that the payment for such services should be received in convertible foreign exchange. These conditions were first introduced in the Rules by the Finance Act, 2006, and were later amended by the Finance Act, 2007. Since the condition of receipt of consideration in foreign exchange is straightforward, this discussion is limited to the other condition of the delivery/use of services outside India.

When the Finance Act 2006 initially introduced the condition of 'delivery and use of service outside India, it did not provide corresponding definitions for the terms 'delivery of service outside India' and 'use of service outside India', thereby leading to considerable uncertainty relating to the determination of export of services.

In March 2007, the condition of delivery of service outside India was removed and the residual condition that remained in place was that the 'services should be provided from India and used outside India'. This has certainly eased things since the condition of delivery of service is no longer present.

Nevertheless, the absence of rules to determine as to what constitutes 'provision of services from India' and 'use of services outside India' continues to create difficulties. The first term i.e. 'the provision of service from India' is generally easily applied to specific situations but difficulties arise in determining how and when the services are supposedly used by a recipient outside India, given that services are typically transient in nature and also intangible in character.

The problem is particularly acute in relation to services which are typically executory in nature, such as marketing services for example which are carried out on behalf of foreign principals. Marketing services typically comprise a range of activities from meeting prospective customers, carrying out promotional events, obtaining orders, executing orders and so on.

The question is whether the performance of such activities would themselves amount to their use outside India or whether such services can only be said to be used by the foreign principals where they receive these services in some form or measure outside India. In other words, are services used outside India merely because the recipient of the services is outside India or should such services be actually used outside India in some demonstrable manner?

The Service Tax Tribunal had occasion to deal with the matter in a recent case of Blue Star Ltd. Vs. CCE (2008-TIOL-716-CESTAT). The facts of the case were that the appellants were booking orders for their principals in the USA/UK and other countries. The orders were booked in India and thereafter the customers directly got in touch with the foreign suppliers. Once the foreign suppliers sold the goods to the customers in India and received their payments, a commission was paid to the appellants.

The appellants argued that their services, of meeting prospective customers and booking orders, were provided from India and used outside India and since the payments for such services were received in convertible foreign exchange, they should be considered as exported from India and hence free of service tax. The Tribunal inter alia considered the underlying agreement between the appellants and their overseas principals.

Unfortunately, no extracts of the agreement have been reproduced in the judgment. The Tribunal held that the conditions of 'provision of services from India' and 'use of services outside India' were both met in this case and hence the services qualified as exports. The Tribunal held that the appellants have rendered services from India. This is, of course, not in doubt. But it has then gone on to hold that such services are also therefore used outside India. The Department's argument that the services were provided in India and hence not exported at all has not been accepted.

The above judgment is significant, being the first one on the interpretation of the condition of provision of service from India and use of service outside India. The Tribunal appears to hold that an executory or a quasi-executory service performed in India could be said to be used by a recipient outside India.

It is fair to suggest, however, that this decision, while clearly a harbinger, is limited to the particular facts underlying the case, especially since it has not expounded on the relevant provisions at any length. A more detailed and reasoned judgment is perhaps needed so that the principles for determination of exports of services from India are authoritatively laid down and understood.

pwctls.nd@in.pwc.com