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Import of Services: U-turn in Reverse Charge Mechanism
28 July, 2010 :
Import of Services: U-turn in Reverse Charge Mechanism

Taxing the Services, which are imported in the country, is not as uncomplicated as Taxing the Goods when imported through any port . It has been a Complex mechanism when it comes to making a decision, under what circumstances an Imported Service is to be Tax or otherwise . The logic of levying such tax was simple, on imported goods there are variety of Custom Duties levied, thus, import of Service should be also be taxed to Service Tax , however its easier said than done. Service is a non-tangible thing in contrast to Goods. The Recipient of Service is made liable to pay Service tax under the Reverse Charge Mechanism. However, the effective date of the Taxing the imported services in the reverse charge method have always been under dispute.

The Dispute related to the effective date came up before Larger Bench of Tribunal which held in case of Hindustan Zinc Ltd Vs. Commissioner of Central Excise, Jaipur - STO 2008 CESTAT 321 that Service recipient not liable to pay Service tax prior to 1-1-2005 for service provided from outside India. The Department 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 - STO 2009 Bom 78, wherein the High Court held that Statutory provision for taxing were absent before enactment of Section 66A of Finance Act, 1994. Thus, Recipient in India is liable to Service tax for service received from abroad only from 18.04.2006. The department again went for an appeal to the Supreme Court. Once again SLP No.18932 / 2009 filed by UOI against the said judgment was dismissed by the Hon'ble Supreme Court vide order dated 14.12.2009.

Surprisingly the issue of effective date of such tax continued to bother the policy makers in CBEC and they came out with a Instruction for Service Tax department.The Commissioner (Legal) vide departmental instruction issued from F.No.275/7/2010-CX.8A Dated : 30.06.2010 has addressed the issue in detail. Wherein it has been stated that, the aforementioned 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. The CBEC further states that the levy of Service Tax on such services has been examined in the cases of (i) M/s. Hindustan Zinc Ltd Vs. Commissioner of Central Excise, Jaipur, by the larger Bench of CESTAT STO 2008 CESTAT 321 and (ii) UOI Vs. M/s. Aditya Cement, by the Hon'ble High Court of Rajasthan, STO 2008 Raj 19 wherein it has been held that Service Tax liability on services received in India from a non resident arises w.e.f. from 1.1.2005, consequent upon issuance of Notification No. 36/2004-ST, dated 31.12.2004, under section 68(2) of the Finance Act, 1994 read with rule 2(1)(d)(iv) of the Service Tax Rules, 1994. In view of the above, as per the CBEC directives ,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. 01.01.2005 as has been upheld by the Court in the cases M/s. Hindustan Zinc Ltd and M/s. Aditya Cement Ltd., distinguishing such cases on facts from the INSA case.

In view of the above, as per the latest Instruction dated 30.6.2010 the accepted position is that, 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. 01.01.2005, 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. And that , 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. 18.04.2006, as is in the case of INSA, where services were received outside India for use in the ships and vessels located outside India.

Further the instruction clarifies that the ratio decidendi of aforementioned judgment in the case of M/s. INSA appears to have 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 STO 2009 Del 877, 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 aforementioned 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.

In view of the above, the field formations are directed by department 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. 01.01.2005 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. Further department has instructed officers to critically examine the pending disputes as to whether the service was received in India or outside India and appropriate action may please be taken for resolution of such disputes.

Thus, now CBEC is trying to kick hornet’s nest by raising a new controversy for a position that was settled by the Apex Court . Undoubtedly. a spree of show cause notices and consequent litigations are at the doorstep of importer of Services. It is a complete U turn by the Department and that too in reverse gear when it comes to Service Tax Reverse Charge Mechanism.

Import of Services

Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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