Export of Service Rules – CBEC clarifies the obvious – 126 Crores demand on Microsoft becomes a bunch of waste papers.
Unlike commodities, as the services are intangible in nature, it is very difficult to define what constitutes export of service given the dynamics of various business models. However, the job has become more or less easy after the ‘Export of Service Rules 2005' have been notified. All the services have been classified into three categories to define the export of services for each of those three categories.
However, it seems the benefit of export of service is being denied in respect of some services on the ground that such services are not used outside India; Board has intervened and clarified whether the following services are to be considered as export of services.
i. Call centres engaged by foreign companies who attend to calls from customers or prospective customers from all around the world including from India;
ii. Medical transcription where the case history of a patient as dictated by the doctor abroad is typed out in India and forwarded back to him;
iii. Indian agents who undertake marketing in India of goods of a foreign seller. In this case, the agent undertakes all activities within India and receives commission for his services from foreign seller in convertible foreign exchange;
iv. Foreign financial institution desiring transfer of remittances to India, engaging an Indian organisation to dispatch such remittances to the receiver in India. For this, the foreign financial institution pays commission to the Indian organisation in foreign exchange for the entire activity being undertaken in India.
It has been clarified that Export of Services Rules, 2005 categorizes the services into three types:
i. Category(I)[Rule3(1)(i)] : For services (such as Architect service, General Insurance service, Construction service, Site Preparation service) that have some nexus with immovable property, it is provided that the provision of such service would be ‘export' if they are provided in relation to an immovable property situated outside India.
ii. Category(II)[Rule3(1)(ii)] : For services (such as Rent-a-Cab operator, Market Research Agency service, Survey and Exploration of Minerals service, Convention service, Security Agency service, Storage and Warehousing service) where the place of performance of service can be established, it is provided that provision of such services would be ‘export' if they are performed (or even partly performed) outside India.
iii. Category(III)[Rule3(1)(iii)] : For the remaining services (that would not fall under category I or II), which would generally include knowledge or technique based services, which are not linked to an identifiable immovable property or whose location of performance cannot be readily identifiable (such as, Banking and Other Financial services, Business Auxiliary services and Telecom services), it has been specified that they would be ‘export',-
(a) If they are provided in relation to business or commerce to a recipient located outside India; and
(b) If they are provided in relation to activities other than business or commerce to a recipient located outside India at the time when such services are provided.
It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within legislation. Keeping this principle in view, the meaning of the term ‘used outside India' has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under Architect service (a Category I service [Rule 3(1)(i]), even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service [Rule 3(1)(ii)]) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase ‘used outside India' is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India.
Netizens may recall our story in case of demand of service tax of Rs 126 Crores
The 'real' and 'surreal' tax demands besiege Microsoft in India!
Microsoft India (Pvt) Ltd has entered into a “Market Development Agreement” with MO, Singapore under which the former will use its best efforts to further the interest of MO and maximize the markets for Microsoft products in India, Bhutan, Nepal and Maldives. For such service, Microsoft (India) Pvt Ltd will issue invoices in USD on MO Singapore. Microsoft (India) has been treating such income as export of service (under Business Auxiliary Service) and therefore has not paid any service tax on the income received. However, Delhi Service Tax Commissioner felt otherwise and issued demand notice.
Now that the Board has clarified that the same has to be treated as export of service, the 126 Crores demand notice has no more value than a bunch of papers. But what about the ACRs written on the basis that “the officers detected evasion of service tax of Rs 126 crores ”? Will they be recalled and re-written?
Circular No., Dated: February 24, 2009