Billings to principal agents invite tax

Q.1 We are engaged in Tour Operation Services. We provide these services directly to our clients and also to the clients of our principal agents. When we provide direct services to our clients, we collect and pay service tax on the invoices raised on the clients. But when we provide services to the clients of our principal agents, we raise the invoices on our agents as per our contract rates, and do not collect and pay service tax on money received against such invoices. Our principal agents, however, collect and pay service tax on the entire value of a tour, which also includes our share of charges. Recently, the service tax authorities issued us a show-cause notice alleging that we were liable to pay service tax on the amount billed by us to our agents for tour operation services. We understand that we are not required to pay service tax on the invoices raised on our principal agents. Moreover, all our billings are credit billings and it takes a minimum 3-4 months to realise the amount against the bills. We can't afford to invest so much money in paying monthly service taxes on our outstanding bills. Please advise.

It is understood that you are providing taxable services covered under the head "tour operator services." Consequently, you are required to collect and pay service taxes both on the direct billing made by you to your customers as well as on the billing to your principal agents for the said services. The fact that your principal agents have paid service tax on the entire value of tour operator services (including your share of charges) charged by them from the ultimate customers does not absolve you of the responsibility to collect and pay service tax on the billings made by you. Accordingly, you are required to charge service tax from your principal agents and deposit it with the government authorities. The service tax amount so charged by you from your principal agents may not constitute additional cost for them as under the CENVAT Credit Rules, 2004, they would be eligible to claim set-off of such taxes from their output service tax liability.

Further, under service tax law, a taxable event is "rendering of a taxable service" but liability to pay service tax arises when consideration is received by a service provider. Accordingly, in case of credit billing by you, service tax is payable only when you receive the consideration.

Q.2 We represent a few foreign companies as their agents in India and market their products to several customers. The customers open direct L/C's to our suppliers for payments and the goods are shipped directly to Indian customers and we receive commission in USD for our aforementioned services. We inter-alia perform the following functions: send an enquiry; offer the principal's price to several customers; negotiate with principals and customers; get the sale done; follow up with customer for L/C; follow up with suppliers for shipping; and ensure principals get the payment. Is service tax applicable on our commission income?

Ans. Your services appear to be in the nature of commission agents' services and are covered under the taxable category of business auxiliary services. As you are providing these services to a foreign principal, service tax would be leviable on the said services if they do not qualify as exports under the Export of Services Rules, 2005 (Export Rules).

Under the Export Rules, business auxiliary services are considered as exports if such services are in relation to business or commerce, the payment for the services is received in convertible foreign exchange, and the services are delivered outside India and used outside India. Although your company is in a position to satisfy the first two conditions mentioned above, the third condition, namely the delivery and use of service outside India, is not met. Your activities like sending an enquiry to customers, offering bids to them, negotiating with them, etc. are essentially performed in India. These activities being executory in nature would be considered delivered at the time when they are performed. Therefore, such services cannot be considered delivered outside India. Consequently, the services of a commission agent provided by your company to foreign principals would not qualify as exports with effect from 19-04-2006 and your company will be liable to pay service tax thereon.

S Madhavan is leader, indirect tax practice, PwC Readers are invited to send in their queries for this column at taxqueries@business-standard.com