[Submitted by Sriharsha K. M.,
Bangalore, Karnataka]

October 19, 2008

The provisions of Chapter V of Finance Act 1994 governing the levy and collection of service tax. It is also apply to the Import of Services. In this article we shall take a look at the important aspects of the ‘Import of Services’.

Import of Services is necessary for all the countries in the world. The statutory provisions use the words “Services provided from outside India and received in India”. Initially, there was no tax on import of services. It was noticed that a number of persons from outside India referred as Non-residents visiting India and rendering the notified taxable services. There was no mechanism and liability on them to pay the service tax and they vanishing from the scene after providing the service. So, there was a huge loss in revenue to the government. The levy with regard to import of services was brought in to effect by giving explanation to the section 65(105) on 16-06-2005. On 19-04-2006, the explanation was omitted and new section 66A was inserted to cover the import of services along with the Taxation of Services (Provided from Outside India and received in India) Rules, 2006.

What are the ingredients for Import of Services?
In order to constitute import of services, the Services provider and Service receiver should satisfy the any one of the conditions prescribed in the following table.

Service Provider Service Receiver
Has established a business in a country other than India. (or) Has his place of business in India. (or)
Has a fixed establishment in country other than India, from which the service is provided or to be provided, (or) Has his fixed establishment in India. (or)
Has his permanent address in a country other than India. Has his permanent address in India.
Has his usual place of residence in a country other than India. Has his usual place of residence in India.

If the conditions in the table is satisfied both by service receiver and service provider, the service will deemed to be taxable service and treated as if the recipient had himself provided a taxable service, so that all the provisions of the Act shall apply.

Whether all services are covered for Service Tax on import of services?
No, all services are not covered for levy on Import of Services. Only the services are mentioned in the section 65(105) of Finance Act are covered. Further, the following 2 services never be treated as ‘Service provided from outside India and received in India’.

  • Air transport of passengers embarking for international travel
  • Transport by cruise ships

These services will also not be treated as ‘Export of Service’ under any situation.

Service Provider having fixed establishment in more than one country:
If the Service provider has fixed establishment in more than one country, then the country where the service provided or to be provided is concerned, that will be treated as a country from the service is received. Even the branch shall be treated as separate entity.

Two permanent establishments are to be treated as two separate persons:
Where a person carrying on a business through permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons. Thus, if the service receiver has a establishment in India and foreign country and if the establishment in India receives a taxable service from its establishment abroad, it will be a taxable service and tax will be payable by Indian establishment as a receiver of service.

Is there is any exemption to Individuals?
Yes, there is an exemption to the individuals receiving services from abroad which is not for the purposes of use in any business or commerce. For example, Mr. A needs to constructs his residential house. He takes a consulting engineer service from the architect of UK. Then, A is not required to pay the Service Tax for service received from abroad.

Service provided and consumed abroad can be taxable?
No, Service provided and consumed abroad cannot be taxable. Service tax is levied on the place of consumption. For charging Service Tax there must be ‘taxable event’ is taking place in India.

Who is required to pay Service Tax to the government?
According to section 66A, the liability of paying Service tax is on the service receiver. Service receiver also needs to register as an assessee with the department. There was no liability on the Service provider to pay the Service Tax.

Import of Services and CENVAT credits:
Rule 5 of Taxation of Services (Provided from outside India and Received in India) Rules, 2006 clarifies that the taxable service will not be treated as output service of the recipient for purposes of utilizing Cenvat credit to pay the Service Tax. Thus, the recipient of service has to pay the Service Tax in cash and he cannot utilize his Cenvat credit for payment of this amount. Further, the service receiver can avail the Service Tax paid as Input Services and can be utilized for payment of Excise duty or Service Tax on Final product or Services.

Service rendered without consideration can be taxable?
Yes, it is taxable. But the value of Service Tax amount becomes zero or nil. Suppose a Service provider from abroad provide a taxable service for free of cost or without any consideration. In such cases, the value of service is taken as zero or nil and service tax is charged on the actual value. So, there is no Service Tax at all.

Exemption to hotel accommodation by and for non-resident:
Notification no.14/2008 give exemption to the service provided by a person from abroad, in relation to booking of an accommodation in the said hotel, for a customer , who has his place of business, fixed establishment, permanent address or usual place of residence, in a country other than India. For example, Mr. A, a foreigner provide service in relation to booking of hotel in India for Mr. B, who is a non-resident, then for such services there will be no need to pay the Service Tax.

Service tax is paid on ‘Reverse Charge’ method:
Normally Service Provider needs to register and pay Service Tax to the government. But in case of import of Services, Service receiver register as an assessee and pay tax to the government. This situation is called ‘Reverse Charge’ method. In ‘Reverse Charge’ method, a legal fiction is created treating as if recipient had himself provided the services domestically and accordingly, the recipient of services is treated as deemed service provider.

Categorization of Services:
For identifying whether the services are so received or not, the services are categorized into three groups. They are as follows:

  1. Property related services:
    Rule 3(i) lays down the criteria in respect of following 10 services. In such cases, the services must be in relation to an immovable property which is situated in India for considering such services as received in India. If the property is situated outside India it is not taxable.
  2. Situs of the Services:
    Rule 3(ii) lays down the criteria in respect of 50 other services, in such cases, the services must either be wholly performed or partly performed in India for considering the services as received in India. In respect of these services, if the wholly of the services are rendered outside India, the same will not be considered as services received in India.
  3. Location of the services:
    Rule 3(iii) is the residual category, and it lays down the criteria in respect of services other than those mentioned in above. In such cases, the recipient of such services shall be located in India and the services are for use in relation to business or commerce.

Discussion of important case laws:
In the case of Aditya Cements V CCE Jaipur
Aditya Cements were received consulting engineer service from a non-resident for the period October 2003 to November 2003, Prior to 1-1-2005, service receiver not liable to pay service tax for the service received from a non-resident. But, the appellant unknowingly paid tax to the government. So, they claim for refund of Service Tax paid by them for that period. It was held in favor of the appellants.

In the case of CCE Raipur V Jindal Steel & Power Ltd.
Bhandari Hosiery Exports ltd is the assessee engaged in the manufacture of hosiery goods. Assessee availed the services of a overseas agent under Business auxiliary services. SCN was issued for the demand of Service Tax for the period 9-7-2004 February 2006 and also imposed the penalty by the department. Assessee argue that section 66A was introduced from 19-4-2006, so only from that period, the Service is taxable not to the old period. Assessee relied upon the decision of Foaster Engg ltd; Assessee is also made cross objection. Finally, the tribunal disallowed the commissioner’s appeal.
From the above 2 case laws it is confirmed that Service Tax on import of services came into effect from 16-06-2005 by giving explanation to the section 65(165).

The new Import of Services Rules, 2006 and insertion of section 66(A) is giving a clear cut picture on the taxability on import of services. To constitute an import of services, the services should provide from abroad i.e. Non-resident to the resident of India. Service tax is paid on the reverse charge method. Service provided and consumed outside is not taxable because taxable event is take place outside India.