Foreign Services – Indian Taxes – Board accepts INSA but wants HZL also to be followed
ONCE upon a time, our wise lawmakers in the CBEC decided to tax services rendered from abroad to Indian recipients and since they had no control over the foreign service providers, they wanted to tax the Indian recipients. But they did not know how to go about it. So they amended the Rules, amended the Act, brought in Notifications and amended them – creating confusion all around. Once everybody accepted this reverse mechanism tax, the moot question was since when? There were several dates doing the rounds. An Additional Commissioner told me – whatever the law or the Courts say, the tax was always there right from the beginning – 1994; it is simple – if you import goods you pay Customs Duty; if you import services, you pay Service Tax.
While all were not so unreasonable, some wanted the tax from 1.8.2002, when the Government amended the ST Rules to make the service recipient liable to pay the tax or from 1.1.2005 when they issued Notification No. 36/2004 or 16.06.2005, when the explanation added to Section 65 became effective or 18.04.2006 when the new Section 66A came into effect.
There are advocates for all the above schools of thought, which means there is plenty of litigation.
In Hindustan Zinc Ltd Vs. Commissioner of Central Excise, Jaipur - , the Larger Bench of the Tribunal held that the Tax is not leviable before 1.1.2005. [It doesn't automatically follow that it can be levied after 1.1.2005]. The Department did not like this and went in appeal to the Supreme Court and their appeal was dismissed.
The controversy appeared to be set at rest with the decision of the Bombay High Court in Indian National Shipowners Association (INSA) Vs. Union of India - , wherein the High Court held that the tax can be levied only from 18.04.2006. The Board was not happy with this judgement also and appealed to the Supreme Court which was dismissed.
Now Board has accepted both Indian National Shipowners Association and Hindustan Zinc but has raised a new controversy.
The Commissioner (Legal) in the Board has recently written to all the Chief Commissioners and Commissioners on the issue.
The Commissioner communicates:
1. It may be noted that the judgment in the case of M/s. INSA Vs . Union of India does not apply to the cases where taxable service, provided by a non-resident, not having any office/establishment in India, is received in India.
2. However, the ratio decidendi of judgment in the case of M/s. INSA appears to have been applied wrongly in a few subsequent cases by the Courts to arrive at the conclusion that service tax would not be leviable before 18.04.2006, even on services received in India, when provided by a non resident. One such case is M/s. Unitech vs. Commissioner of Service Tax, Delhi - , wherein Hon'ble High Court of Delhi, applying the ratio of M/s. INSA case has held that service tax liability on the architectural service provided by a non resident to M/s. Unitech in India would arise w.e.f.18.04.2006 . This order has not been accepted, as Department is of the view that service tax liability in such cases arises w.e.f 1.1.2005, on reverse charge basis, in view of the ratio laid down in the cases of M/s. Hindustan Zinc Ltd and M/s. Aditya Cement. Accordingly, an SLP has been filed before the Hon'ble Supreme Court in this case.
3. In view of the above, the field formations are directed to defend the view that the levy of service tax on taxable services received in India from a non-resident, not having any office in India, arises on reverse charge basis, w.e.f.1.1.2005 as has been upheld by the Apex Court in the cases M/s. Hindustan Zinc Ltd and M/ s.Aditya Cement Ltd., distinguishing such cases on facts from the INSA case. However, levy of service tax in respect of cases where service is received outside India would follow the ratio in the aforementioned case of M/s. INSA vs UOI.
According to the learned Commissioner, the accepted position is that,
(i) in case of taxable service provided by a non-resident, not having office/ establishment in India, and received in India , the service tax liability arises w.e.f.1.1.2005 , on reverse charge basis on the recipient of service in India. Therefore, the overall facts and circumstances of each case needs to be taken into account to determine whether service is received in India or otherwise.
(ii) in case of taxable service received outside India by a person, who is resident in India or has place of business/business establishment in India, the service tax liability arises w.e.f.18.4.2006 , as is in the case of INSA , where services were received outside India for use in the ships and vessels located outside India.
Now can a Commissioner sit in judgement over a High Court order? Can the Commissioner say that Delhi High Court has wrongly applied the ratio of the Bombay High Court order? The Commissioner informs that the Department has filed an SLP against the Unitech decision, but as usual the SLP was filed belatedly and the Supreme Court has given notice on delay. Now what will happen if the Supreme Court does not condone delay?
The Commissioner says that services received outside India are taxable w.e.f.18.4.2006 . Does he mean all services ?. Even after 18.04.2006, only certain services received abroad are taxable under the reverse charge mechanism. In his eagerness to sit in judgment over the High Court orders, the learned Commissioner probably forgot to refer the law prevailing from 18.04.2006. He has not referred to the “The Taxation of services (Provided from Outside India and Received in India) Rules, 2006.”
What will happen now? The Field will fill the field with Show Cause notices to collect tax on all services received abroad.
Board's love for litigation is unlimited!
CBEC Letter F. No. 275/7/2010- CX.8A, Dated : June 30, 2010