The migration of the Indian economy from its agrarian route through its industrial phase to its current position as a Universal Service House has soon reflected changes in the pattern of taxation. With the growing economy importance of services has harnessed an expected contribution of 48% to the GDP from this sector in the fiscal year 2003-04, the provision of services was far too important an avenue of taxation for the Government to ignore.

Universally, services were traditionally taxed through the mechanism of VAT as a combined levy of both goods and services. The levy of VAT was cushioned by an almost universal credit coverage and cross utilization of credits available from taxes paid on goods or services for any antecedent tax paid whether on goods or services.

The Constitutional mandate for the levy is traceable to Entry 97 in list 1 of the Seventh Schedule to the Constitution of India. In its inception, the levy had a limited coverage and extended to 3 services. The rate of tax at 5% in comparison to other indirect taxes seemed innocuous. In its current form where the levy extends to 59 taxable services at a rate of 8%, Service Tax is clearly the Government’s best performing levy with a potential for exceptional growth rates expected to scale from 8% to 16% in the near future, and its integration with the comprehensive nationwide VAT on goods and services.

Levy of service tax

The ingredients for the levy of Service Tax are an accumulative satisfaction of the following:

1. The rendering of a taxable service as defined under the enactment – current coverage of 60 identified services.

2. The fact that such service is provided by an identified service provider E.g. in the case of Banking and Financial services, the ‘identified service provider’ would be a Banking Company/NBFC/Financial institution/any other body corporate. In the case of Broadcasting Agency, the ‘identified service provider’ would be a Broadcasting Agency.

3. That the taxable service is provided to the identified service recipient. A service recipient may be referred to as a ‘client’ ‘customer’ or any person who acquires the services of a service provider.

The taxing event

The taxing event in terms of the charging section 66 is the provision of one of the specified taxable services. The liability to tax arises when a taxable service is provided. The event of collection is, however, delayed up to the point of time that the service provider receives the consideration for the taxable service provided. Service Tax is destination based and hence is in the nature of consumption tax. The tax is leviable where the taxable event occurs, namely where the service is rendered. In other words it has a territorial nexus with the recipient of the service. A foreigner rendering services in India is hence liable to pay the service tax.

Rule 2(d)(iv) of the Service Tax Rules, 1994 effective August 16, 2002 covers a ‘person liable for paying service tax’ in relation to any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India, the person receiving the taxable service in India. The transfer of liability from the service provider to the service recipient seems to be contrary to the ratio of the Hon’ble Supreme Court in Laghu Udyog Bharti & Anr. vs. UoI & Ors. reported in 112 ELT 365 (SC)

There is no other mechanism for the recovery of tax from a service provider based outside India similar to the provisions for deduction of tax at source under the Income-tax Act, 1961.

Export of services

There is a great deal of uncertainty about service providers based in India rendering services to recipients or beneficiaries outside India. The issues are:

1. what constitutes the "export of services"; and

2. whether the export of services are liable to the payment of Service Tax.

By the Ministry of Finance (MoF) Circular No. 56/5/2003 dated 25th April, 2003, it was inter alia, clarified that:

1. the rescission of Notification No. 6/99-ST dated 9th April, 1999, denied exemption only in respect of services provided in India for which payment was received in convertible foreign exchange.

2. the rescission of the Notification No. 6/99-ST dated 9th April, 1999 did not affect the export of services which would "continue to remain tax free". (this exemption is presumably in terms of Circular No. 36/4/2001 dated 8th October, 2001, which clarifies that services provided beyond the territorial jurisdiction of India are not liable to Service Tax).

3. It was clarified that Service Tax is a ‘destination based consumption tax’ and is not applicable on the export of services.

After Circular No. 56/5/2003 dated 25th April, 2003 was issued, it was appropriate to proceed on the basis that the situs of the consumption of the services would determine the liability to Service Tax. In terms of the said Circular, in a case where a service was provided from India but was consumed outside India, this would be considered as an export of service and would not be liable to Service Tax.

There have been doubts raised on the question whether services provided outside the limits of Indian territorial waters are liable to Service Tax. By Circular No. 36/4/2001 dated 8th October, 2001 the Central Board of Excise and Customs (CBEC) clarified that the provisions relating to Service Tax applied to the whole of India except the State of Jammu and Kashmir. The expression, "India" includes the territorial waters of India and the Indian territorial waters extend up to twelve nautical miles from the Indian landmass. The said circular also clarified that the provisions relating to Service Tax had not been extended to the designated areas in the Continental Shelf and the Exclusive Economic Zone of India and therefore the services "provided" beyond the territorial waters of India are not liable to Service Tax.

Thereafter, by Notification No. 1/2002- ST dated 1st March, 2002 the provisions of Chapter V of the Act were extended to the designated areas in the Continental Shelf and the Exclusive Economic Zones of India.

Notification No. 6/99- ST dated 9th April, 1999 exempted the taxable services ‘of which the payment is received in India in convertible foreign exchange, from the whole of the Service Tax leviable thereon under section 66 of the Act".

Notification 6/99 supra was rescinded by Notification 2/2003- ST dated 1st March, 2003 and the currency in which the consideration was received became irrelevant for the taxability of services under the provisions of Chapter V of the Act. Doubts were raised as to the taxability of services, which were exported out of India. After the recession of Notification 2/2003-ST, doubts were raised whether Service Exports would be subjected to Service Tax. To allay doubts on the taxability of service exports, CBEC issued Circular No. 56/5/2003 dated 25th April, 2003. In the said circular, it was, inter alia, mentioned that Service Tax is a "destination-based consumption tax". Thereafter, it was clarified that the export of services would continue to be tax free even after the withdrawal of Notification No. 6/99-ST.

After the aforesaid circular was issued, various doubts have arisen as to what constitutes Export of Service and what is meant by the term, "destination-based consumption tax" and what is the extent of the applicability of the Act and what constitutes export of Services.

While the debate on what constitutes "export of service" continues, the provisions of Notification 6/99-ST have been resurrected in the form of Notification 21/2003-ST dated 20th November, 2003 and now services for which the consideration is received in convertible foreign exchange will be exempted from the levy of Service Tax provided the foreign exchange is not repatriated from India.

New Draft Rules for defining what would constitute export of services for different services have also been recently put up for public comment. The Draft Rules adopt three different basis for determining whether a service can be treated as an export of services. According to the Draft Rules, the taxable service shall have been exported if:

1. The service is physically carried out, partly or wholly, outside India examples being Clearing and Forwarding Agents, Cargo Handling Services Commissioning and Installation Services etc.

2. The services relate to some immovable property, and the said immovable property is located outside India. Examples being Real estate consultancy, Interior decorators etc.

3. The recipient of the service is located outside India examples being Stock Brokers Services, Technical Testing and Analysis, Banking and Other Financial Services etc.

The debate on "export of services" has thus received considerable attention and has been the subject of several clarifications.

Nature of services

Binding effect of Circulars, Notifications and Trade Notices

The Hon’ble Supreme Court in a catena of decisions has held that clarifications / instructions issued by the board are binding on the Department and the Department cannot be permitted to take a stand contrary to the instructions issued by the Board. The following judgements of Hon’ble Supreme Court have elucidated the same:

• CCE vs. Kores (India) Limited [1997 (89) ELT 441]
  "A Tariff Advice or a Trade Notice issued by the Board certainly does not bind the Tribunal or the Courts and an assessee may argue that it is erroneous; but it is not open to the Revenue to advance arguments that are contrary to the terms thereof. Upon this short ground alone, the appeals must be dismissed."
   

• Ranadey Micronutrients vs. CCE [1996 (87) ELT 19]
  "One should have thought that an officer of the Ministry of Finance would have greater respect for circulars such as these issued by the Board, which also operates under the aegis of the Ministry of Finance, for it is the Board which is by statute, entrusted with the task of classifying excisable goods uniformly. The whole objective of such circulars is to adopt a uniform practice and to inform the trade as to how a particular product will be treated for the purposes of Excise duty. It does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with a statutory provision. Consistency and discipline are of far greater importance that the winning or losing of court proceedings".
   

• Collector of Central Excise vs. Jayant Dalal Private Limited [1996 (88) ELT 638 (SC)]
  "Having regard to the Tariff Advice which was issued by the Central Board of Excise and Customs, it is difficult to see how the Collector could have held otherwise, now the Revenue could have argued otherwise before the Tribunal, and how the Revenue could have filed this appeal."
   

• Poulose and Mathen vs. Collector of Central Excise [1997 (90) ELT 264 (SC)]
  "One aspect deserves to be noticed in this context. The earlier tariff advice No. 83/81 on the basis of which trade notice No. 220/81 was issued by the Collector of Central Excise and Customs is binding on the department. It should be given effect to. There is no material on record to show that this has been rescinded or departed from, and even so, to what extent. Even assuming that the later tariff advice No. 6/85 has taken a different view – about which there is no positive material – the facts point out that the concerned department itself was having considerable doubts about the matter. The position was not free from doubt. It was far from clear. In such a case, where two opinions are possible, the assessee should be given the benefit of doubt and that opinion which is in its favour should be given effect to. In the light of the above, it is unnecessary to adjudicate the other points involved in the appeal on the merits."
   

• Paper Products Limited vs. CCE [1999 (112) ELT 765]
  "Show cause notice or consequential demand are ab initio bad if they are contrary to the existing circulars of the board".
   

• CCE vs. Dhiren Chemical Industries [2002 (139) ELT 3]
  "We need to made it clear that, regardless of the interpretation that we have placed on the said phrase, if there are circulars which have been issued by the CBEC which place a different interpretation upon the said phrase, that interpretation is binding upon the Revenue."
   

• CCE vs. Dhiren Chemical Industries [2002 (143) ELT 19]
  "However, it held that, regardless of the interpretation placed by it on that phrase, if there were circulars which had been issued by the Central Board of Excise and Customs which placed a different interpretation upon that phrase, that interpretation would be binding on the Revenue. It is not disputed that there are circulars issued by the Central Board of Excise and Customs which place a different interpretation upon that phrase and which apply to the facts of these two appeals."

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