Taxability of services provided by non-residents

One of the vexed questions under service tax law has been with regard to the taxability of services in the hands of the recipient of services, as a ‘reverse charge’, against the normal practice of taxability in the hands of the service provider. This question has been particularly relevant in relation to services rendered in India by non residents not having an Indian presence.

There is an entirely separate and similarly vexed question as to the taxability of services rendered by such non residents from outside India and received in India, as imports of services, and of services provided by such non residents outside India and also received outside India by Indian recipients. This article is limited to the first question.

 

By way of providing context, amendments were first made to the Service Tax Rules in 1997 in order to require the recipients of services to pay the tax. These were initially struck down by the Supreme Court in the Laghu Udhyog Bharti case (1999 (112) ELT-365) on the ground that the Finance Act, 1994, as it stood then, did not enable the Government to tax the recipients, as against the providers.

Subsequent retrospective amendments were made to remove this infirmity and these were upheld by the Supreme Court. The aforesaid developments are important because they marks the genesis of the ‘reverse charge’ provisions in Indian service tax law.

Particular to the subject matter at hand i.e. taxable services provided by a person who is a non resident and is from outside India and does not have an office in India, Rule 2(1)(d)(iv) of the Service Tax Rules 1997 was inserted vide Notification No. 12/2002-ST dated Aug 1, 2002, in order to lay down that as regards services provided by the aforesaid persons, the recipients in India were liable for paying the service tax thereon.

However, Section 68 of the Finance Act lays down the manner of payment of the tax and specifies the person who is required to pay it. Whereas sub clause (1) of Section 68 states that the service provider is required to pay the tax, sub clause (2) of this Section, which has been in force from the inception of the service tax law, states that in respect of any taxable services notified thereunder, the service tax thereon shall be paid by such other person and in such manner as may be prescribed.

In terms of the powers granted under the above Section, Notification No. 36/2004 dated 31/12/2004 and effective from Jan 1, 2005, was issued to, inter alia, require the recipient of a service provided by a person who was a non resident or who was from outside India and did not have an office in India, to pay the tax.

Thus, whereas Rule 2(1)(d)(iv) of the Service Tax Rules required the Indian recipient of taxable services provided by non residents etc. to pay the tax with effect from Aug 1, 2002, such services were independently notified and consequently made taxable in the hands of the Indian recipients with effect from Jan 1, 2005,, vide the relevant amendments to Section 68(2). This situation has created significantly uncertainty and led to prolonged litigation.

It may be noted that both Rule 2(1)(d)(iv), as well as the services notified under Section 68(2) refer to taxable services provided by a person who is a non resident or is from outside India and who does not have an office in India.

The identical wordings clearly imply that the taxable services contemplated therein should have been provided in India by such non residents etc. Therefore, the aforesaid provisions do not extend to situations of imports of services by Indian recipients.

As earlier indicated, the independent provisions relating to taxability of such imports of services have also generated controversy but that is unrelated to the challenge that has been posed as a result of the differing dates of coming into force of Rule 2(1)(d)(iv) and the notification of taxable services under Section 68(2).

In a recent decision in Hindustan Zinc Ltd Vs CCE (2008 VIL-18), the Larger Bench of the Tribunal has addressed this controversy. The Bench was constituted in view of earlier conflicting decisions in the matter. The Tribunal analysed the provisions of Section 68(2) and came to the conclusion that the services in relation to which the service recipient was to be made liable for the tax were to be first identified and specified through a notification.

It is only thereafter that the person liable to pay service tax on such notified services could be specified and this could be done through the relevant Rules. It was argued by the Revenue that the Central Government was always authorised to specify the manner of collection and recovery of the service tax, including the person from whom the tax was to be so collected and recovered. Therefore, notwithstanding that taxable services were not notified under Section 68(2) the Rules could themselves satisfy the twin tests of both the notification of the taxable services as well as the identification of the person liable to pay tax thereon. Consequently, the insertion of Rule 2(1)(d) (iv) with effect from Aug 1, 2002, was valid in law and the ‘reverse charge’ mechanism in relation to services provided in India by non residents etc. were chargeable to tax in the hands of the Indian recipients on and from the above date.

The Tribunal did not accept this argument and held that Section 68(2) first required the notification of the services in relation to which the service recipient could made liable to the tax and this could not be done through the Rules. The Tribunal also took note of the fact that for subsequent notifications of taxable services under Section 68(2), corresponding amendments were made to Rule 2(1)(d) as well.

This reflected the understanding of the Government that both Section 68(2) and the Rule 2(1)(d) were to be read as complementary to each other and both needed to be appropriately invoked/amended in order to charge specified taxable services to tax in the hands of anyone other than the service provider.

Consequently, the Tribunal held that taxable services provided in India by non residents etc. would be taxable in the hands of the service recipients only on and from January 1, 2005, and not from any earlier date. The decision is well founded and is based on an authoritative exposition of the relevant provisions of service tax law. It is therefore hoped that the Department would accept the decision of the Larger bench as above and thus put an end to the prolonged controversy.

The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers

pwctls.nd@in.pwc.com