Taxability of International Private Leased Circuit (IPLC) Service – Board Withdraws Erroneous Clarification
INTERNATIONAL Private Leased Circuit service providers act as a lifeline for the IT/BPO Industry as well as many MNCs in India. The IT/BPO sector as well as the MNCs incur expenses running into millions of dollars to avail of these services directly from the service providers located outside India or through group companies/associated enterprises (in case of MNCs) located outside India.
It may be noted that Lease Circuit service was brought into the service tax net from 16.07.2001 and from August 2002 onwards, when the concept of reverse charge mechanism was introduced in the service tax law, this segment of service recipients were a harassed lot. Troubles mounted when this reverse charge mechanism was fortified through section 66A of the Finance Act, 1994 from April 18, 2006. The service recipients of IPLC services in India were saddled with huge service tax demands and they were additionally burdened with litigation expenses to fight these demands and all of these exerted tremendous pressures on their bottom line. Also, one can never lose sight of the fact that when economy tumbles, this is the sector, which takes the first hit.
After concerted efforts from industry associations and bigwigs from IT/BPO sector, Board acted on their representations and issued a clarification through Circular F.No.137/21/2011-Service Tax dated July 15, 2011, wherein it was clarified that,
++ The activities are in the nature of Leased Circuit services presently covered under Telecommunication service. However, for getting classified under Telecommunication service, Section 65 (105 (zzzx) of the Finance Act, 1994 provides that the service should be provided by a Telegraph authority. Telecommunication service as defined under Section 65 (109a) covers services, which are provided by a person who has been granted a licence under the first proviso to sub-section (I) of section 4 of the Indian Telegraph Act, 1885. In this situation in the instant case since the service provider is located abroad, he is not covered under the definition given in Section 65 (109a). Thus, the service provided by foreign vendors cannot be taxed under Telecommunication service.
So far so good! But unfortunately, Board's clarification did not end there. Being a "Revenue" Board, it probably did not want to let go of the chance to rake in the tax moolah. It went a step ahead and said,
++ The activity of receiving IPCL service from abroad is chargeable to Service Tax under Business Support Service [Section 65 (105)(zzzq) ibid] at the hands of recipients situated in India in terms of Section 66A of the Finance Act, 1994, read with Rule 2 (1) (d) (iv) of the Service Tax Rules. 1994 and provisions of Taxation of Services (Provided) From Outside India and Received in India, Rules 2006 apply.
This Circular, instead of as acting as a soothing balm threw the ‘issue' from the frying pan into the fire, much to the consternation of the IT/BPO industry. Thankfully, Board has now “corrected” (shall we say ‘admitted its lapse') itself and came out with a fresh clarification which states,
Please refer to the clarifications issued vide Board's letter of even number dated 15.07.2011 on the subject mentioned above.
The matter has been re-examined and it is seen that the IPLC is specifically covered by the definition of the telecommunication service given in clause 65 [109a(iv)] of the Finance Act, 1994. As per the said section, these services are taxable only when provided by a person who has been granted a licence under the first proviso to sub-section (1) of section 4 of the Indian Telegraph Act, 1985. It is only because the foreign telecom service provider cannot constitute a telegraph authority under an Indian law that they remain outside the taxability clause of the telecommunication service.
Therefore, the view taken in the said letter that what otherwise constitutes a "telecommunication service" would amount to "business support service" is erroneous.
The clarifications issued vide the above mentioned letter stands corrected accordingly.
Finally, wisdom prevailed and correction followed suit. We should commend the Board in correcting itself and coming out with a suitable amendment to its earlier clarification. Let us hope this matter rests here and pray that there is no intention of bringing these service providers into tax net through a retrospective amendment in the forthcoming budget. After all, our government needs tonnes of money for its ever expanding welfare schemes and it will explore every opportunity to squeeze whatever tax revenue is possible.
Please also see
in which we had raised a similar issue in respect of Banking and other financial services , and
An article critically analyzing the merits and demerits of Board Circular Dated July 15, 2011 - Leased Circuit: Giving Clarification or Adding to Confusion!
DDT also hopes that the other issue raised inTIOL- with regard to “Banking and Other Financial Services” will be acted upon by the Board at the earliest and an appropriate clarification is issued setting rest to the unwarranted litigation on that issue as well.
CBEC Letter F. No. 137/21/2011–Service Tax, Dated: December 19, 2011