Mere receipt of payment in FC is not Export of Service under Service Tax

 RS Sharma Advocate

 Though many service providers are claiming exemption from service tax on the ground that the payment for the service in question has been received in foreign currency but it does not mean that they are entitled for exemption from service tax on this ground alone.

“Payment for such service is received by the service provider in convertible foreign exchange” is only one of the conditions for claiming exemption from service tax under Rule 3 of Export of Services Rules 2005 while other conditions stipulated therein are also required to be fulfilled for eligibility to exemption from service tax.

Rule 4 of Export of Services Rules 2005 provides that any service, which is taxable under clause (105) of section 65 of the Act, may be exported without payment of service tax.  

But the service is treated as ‘Export of Service” only when the conditions under Rule 4 of Export of Services 2005 as cited under are fulfilled

“(1) Export of taxable services shall, in relation to taxable services.–

(i) specified in sub-clauses (d), (p), (q), (v), (zzq), (zzza), (zzzb), (zzzc), (zzzh) , (zzzr), (zzzy), (zzzz) and (zzzza) of clause (105) of section 65 of the Act, be provision of such services as are provided in relation to an immovable property situated outside India;

(ii) specified in sub-clauses (a), (f), (h), (i), (j), (l), (m), (n), (o), (s), (t), (u), (w), (x), (y), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv),(zw), (zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzl), (zzm), (zzn), (zzo), (zzp), (zzs), (zzt), (zzv), (zzw), (zzx), (zzy), (zzzd), (zzze), (zzzf), (zzzp), (zzzzg), (zzzzh) and (zzzzi) of clause (105) of section 65 of the Act, be provision of such services as are performed outside India:

Provided that where such taxable service is partly performed outside India, it shall be treated as performed outside India;

Provided further that where the taxable services referred to in sub-clauses (zzg), (zzh) and (zzi) of clause (105) of section 65 of the Act, are provided in relation to any goods or material or any immovable property, as the case may be, situated outside India at the time of provision of service, through internet or an electronic network including a computer network or any other means, then such taxable service, whether or not performed outside India, shall be treated as the taxable service performed outside India.

(iii) specified in clause (105) of section 65 of the Act, but excluding.–

(a) sub-clauses (zzzo) and (zzzv);

(b) those specified in clause (i) of this rule except when the provision of taxable services specified in sub-clauses (d), (zzzc) and (zzzr) does not relate to immovable property; and

(c) those specified in clause (ii) of this rule, when provided in relation to business or commerce, be provision of such services to a recipient located outside India and when provided otherwise, be provision of such services to a recipient located outside India at the time of provision of such service:

Provided that where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located outside India.

Provided further that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is provided to a recipient located outside India, then such taxable service shall be treated as export of taxable service subject to the condition that the tangible goods supplied for use are located outside India during the period of use of such tangible goods by such recipient.

(2) The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:-

(a) such service is provided from India and used outside India; and

(b) payment for such service is received by the service provider in convertible foreign exchange.

Explanation.-For the purposes of this rule "India" includes the installations, structures and vessels in the continental shelf of India and the exclusive economic zone of India”

Thus the condition that the service is used outside India is equally important. Though many companies are claiming exemption on service provided by them on the ground that they are receiving payment in foreign currency based on opinion of their Consultants who might have charged them Rs 1 lakh for Opinion but they may be in for a shock when the Service Tax Audit department visits them for audit of their records. At a subsequent stage when the demand is issued; they may not be in a position to recover from their clients and they may be required to pay interest at the rate of 13 per cent and penalty equal to service tax involved from their pocket. It is in their interest to seek a second or third opinion from another Advocate as opinion of even the best Consultant can be wrong when the issue is highly debatable.

CESTAT in a recent ruling in case of AIT-2009-360-CESTAT has ruled as under:

“place of performance of service is decisive for determining event of taxability as well as incidence of tax. The appellant appears to have performed service in India for ultimate consumption thereof in India by its clients/customers in India. The service is destined to exhaust in India and extinct soon after performance thereof. Post performance liability only remains to be discharged by foreign principal through the appellant in India. Thus the beneficiaries of services were located in India for ultimate consumption of the service provided in India.

the services provided by the appellant were only to benefit the consumers of Indian Territory and that was provided for and on behalf of the holding company in USA as well as the subsidiary in Singapore. The end user of service being located in India and need of such consumers being met by the appellant for and on behalf of its foreign principal, such services appear to have been provided in India and there appears no export of service. The foreign principal acted through its appellant Agent. The principal was not the beneficiary. A service provider acting directly or indirectly through its agent is not the beneficiary of service so provided while providing of service is its contractual obligation under terms of contract with clients/customers. Therefore in the present case of the appellant no service has occasioned to move out of India to a place out side India following well tested meaning of the term "export" under Section 2(18) of the Customs Act, 1962.

business auxiliary service provided by a service provider in terms of Section 65(105)(zzb) of Finance Act, 1994 is taxable for the rationale that the principal to whom the marketing support is given by the service provider, ultimately makes available of goods or services to the consumers in India. Similarly marketing support provided to the foreign principal as agent thereof also results with either ultimate supply of goods or provision of services to the consumers of India only and service reaches its destination in India to the intended consumer of the goods or services. Therefore whether service is directly provided by a foreign Principal in India or foreign principal providing service in India through its agents in India makes no difference under service tax law when service tax is a VAT and that too destination based consumption tax as per Apex Court Judgment in All India Fedn. of Tax Practitioners (supra). Had the service been provided to the foreign principal not resulting with ultimate supply of goods or provision of service to the consumer in India, such services might have assumed the character or nature of export of service following tested principles of customs law in India” 

Early identification of issue is more important for service providers rather than pushing the issue below the carpet. Several MNCs are already sitting on a Bomb claiming exemption from service tax based on the opinion of their Consultants. But how long the bomb will take in exploding is just a matter of time as service tax department has decided to ask for the agreements under which exemption is being claimed. Audit of all major service providers is already in offing. The lesson is never rely on opinion of a sole Consultant. Though many Consultants may boast of drafting of agreement on how to save service tax and may charge Rs 5 Lakh for drafting such agreement; when the service tax department calls for the copies of these agreements; these very Consultants ask the client not to submit the copy of agreement to the department knowing well that their agreement will not pass the test of exemption. 

(Writer is an Advocate based in Delhi. He is advising several MNCs, PSUs and Indian Corporates on service tax, excise and customs matters. He can be mailed at rssharma@gmail.com)

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