5.1 Introduction 5.1.1 What is the relevance of the ‘Place of Provision of Services Rules, 2012’? The ‘Place of Provision of Services Rules, 2012’ specify the manner to determine the taxing jurisdiction for a service. Hitherto, the task of identifying the taxing jurisdiction was largely limited in the context of import or export of services. For this purpose rules were formulated which handled the subject of place of provision of services somewhat indirectly, confining to define the circumstances in which a provision of service would constitute import or export. The new rules will, on the other hand, determine the place where a service shall be deemed to be provided, in terms of section 66C of the Finance Act, 2012, read with section 94 (hhh) of Chapter V of the Finance Act, 1994. Under Section 66B, a service is taxable only when, inter alia, it is “provided (or agreed to be provided) in the taxable territory”. Thus, the taxability of a service will be determined based on the “place of its provision”. The ‘Place of Provision of Services Rules, 2012’ will replace the ‘Export of Services, Rules, 2005’ and ‘Taxation of Services (Provided from outside India and received in India) Rules, 2006.
5.1.2 For whom are these rules meant? These rules are primarily meant for persons who deal in cross-border services. They will also be equally applicable for those who have operations with suppliers or customers in the state of Jammu and Kashmir. Additionally service providers operating within India from multiple locations, without having centralized registration will find them useful in determining the precise taxable jurisdiction applicable to their operations. The rules will be equally relevant for determining services that are wholly consumed within a SEZ, to avail the outright exemption. 5.1.3 What is the basic philosophy of these rules? The essence of indirect taxation is that a service should be taxed in the jurisdiction of its consumption. This principle is more or less universally applied. In terms of this principle, exports are not charged to tax, as the consumption is elsewhere, and services are taxed on their importation into the taxable territory. However, this determination is not easy. Services could be provided by a person located at one location, actually performed at another while being delivered to a person located at a third location, and occasionally actually consumed at a third location or over a larger geographical territory, falling in more than one taxable jurisdiction. For example a person located in Mumbai may buy a ticket on internet from a service provider located outside India for a journey from Delhi to London. On other occasions the exact location of service recipient itself may not be available e.g. services supplied electronically. As a result it is necessary to lay down rules determining the exact place of provision, while ensuring a certain level of 52 harmonization with international practices in order to avoid both the double taxation as well as double non-taxation of services. It is also a common practice to largely tax services provided by business to other business entities, based on the location of the customers and other services from business to consumers based on the location of the service provider. Since the determination in terms of above principle is not easy, or sometimes not practicable, nearest proxies are adopted to provide specificity in the interpretation as well as application of the law. 5.2 Basic Framework 5.2.1 How will a person determine the taxability of a service in terms of these rules? As stated earlier, in terms of section 66B, a service is taxable only when, inter alia, it is “provided (or agreed to be provided) in the taxable territory”. Thus, the taxability of a service will be determined based on the place of its provision. For determining the taxability of a service, therefore, one needs to ask the following questions sequentially:- 1. Which rule applies to the service provided specifically? In case more than one rules apply equally, which of these come later in the order given in the rules? 2. What is the place of provision of the service in terms of the above rule? 3. Is the place of provision in taxable territory? If yes, tax will be payable. If not, tax will not be payable. 4. Is the provider ‘located’ in the taxable territory? If yes, he will pay the tax. 5. If not, is the service receiver located in taxable territory? If yes, he may be liable to pay tax on reverse charge basis. 6. Is the service receiver an individual or government receiving services for a nonbusiness purpose, or a charity receiving services for a charitable activity? If yes, the same is exempted. 7. If not, he is liable to pay tax. 5.2.2 What is “taxable territory”? What is its significance? Taxable territory has been defined in sub-section 52 of section 65B. It means the territory to which the provisions of Chapter V of the Finance Act, 1994 apply i.e. whole of India excluding the state of Jammu and Kashmir. “Non-taxable territory” is defined in sub-section 35 ibid accordingly as the territory other than the taxable territory. “India” is defined in sub-section 27 of section 65 B, as follows: “India” means— (a) the territory of the Union of India as referred to in clauses (2) and (3) of article 1 of the Constitution; 53 (b) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976; (c) the sea-bed and the subsoil underlying the territorial waters; (d) the air space above its territory and territorial waters; and (e) the installations structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof; The new charging section, section 66B, enables taxation of only such services as are provided in taxable territory. Thus services that are provided in a non-taxable territory are not chargeable to service tax. 5.2.3 What is the significance of “Location” of a Service Provider or Receiver for determining taxing jurisdiction? In terms of explanation (2) to sub-section 44 of section 65B, an establishment of a person outside the taxable territory is a person distinct from an establishment in a taxable territory. Thus, services provided from overseas are to be carefully judged whether they are being rendered by the establishment outside the taxable territory or within. Similarly, from the taxpayer’s perspective the jurisdiction of the field formation, which is relevant for compliance with registration formalities, filing of returns, refund claims etc. by the person liable to pay tax (provider or receiver as the case may be), will be the “location” as determined in terms of these rules. 5.2.4 How will such “location” be determined? The location of a service provider or receiver (as the case may be) is to be determined by applying the following steps sequentially: A. where the service provider or receiver has obtained only one registration, whether centralized or otherwise, the premises for which such registration has been obtained; B. where the service provider or receiver is not covered by A above: i. the location of his business establishment; or ii. where services are provided or received at a place other than the business establishment i.e. a fixed establishment elsewhere, the location of such establishment; iii. where services are provided or received at more than one establishment, whether business or fixed, the establishment most directly concerned with the provision or use of the service; and iv. in the absence of such places, the usual place of residence of the service provider or receiver. 54 It is important to note that in the case of a service receiver, the place relevant for determining location is the place where the service is “used” or “consumed”. Flow Diagram F1 at the end of this section illustrates the manner of determination of location. 5.2.5 What is the meaning of “business establishment”? ‘Business establishment’ is the place where the essential decisions concerning the general management of the business are adopted, and where the functions of its central administration are carried out. This could be the head office, or a factory, or a workshop, or shop/ retail outlet. Most significantly, there is only one business establishment that a service provider or receiver can have. 5.2.6 What is the meaning of a “fixed establishment”? A “fixed establishment” is a place (other than the business establishment) which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to provide the services that are to be supplied by it, or to enable it to receive and use the services supplied to it for its own needs. Temporary presence of staff by way of a short visit at a place cannot be called a fixed establishment. Also, the number of staff at a location is not important. What is relevant is the adequacy of the arrangement (of human and technical resources), to carry out an activity for a consideration, or to receive and use a service supplied. Similarly, it will be important to evaluate the permanence of the arrangement i.e. whether it is capable of executing the task. For further guidance on when a fixed establishment of a service receiver would be treated as “location”, please see para 5.3.4. 5.2.7 How will the establishment “most directly concerned with the supply” be determined? This will depend on the facts and supporting documentation, specific to each case. The documentation will include the following:- • the contract(s) between the service provider and receiver; • where there are no written contracts, any written account (documents, correspondence/e-mail etc) between parties which sets out in detail their understanding of the oral contract; • in particular, for suppliers, from which establishment the services are actually provided; • in particular, for receivers, at which establishment the services are actually consumed, effectively used or enjoyed; • details of how the business fits into any larger corporate structure; • the establishment whose staff is actually involved in the execution of the job; 55 • performance agreements (which may be indicative both of the substance and actual nature of work performed at a particular establishment); Thus , normally in the case of multiple establishments of a person, it will be the establishment that actually provides, or receives (i. e. uses or consumes), a service that would be treated as ‘directly concerned’ with the provision of service, notwithstanding the contractual position, or invoicing or payment. For further guidance in this regard, please see section 5.3.4. Illustration 1 A business has its headquarters in India, and branches in London, Dubai, Singapore and New York. Its business establishment is in India. Illustration 2 An overseas business house sets up offices with staff in India to provide services to Indian customers. Its fixed establishment is in India. Illustration 3 A company with a business establishment abroad buys a property in India which it leases to a tenant. The property by itself does not create a fixed establishment. If the company sets up an office in India to carry on its business by managing the property, this will create a fixed establishment in India. Illustration 4 A company is incorporated in India, but provides its services entirely from Singapore. The location of this service provider is Singapore, being the place where the establishment most directly concerned with the supply is located. 5.2.8 What does “usual place of residence” mean? The usual place of residence, in case of a body corporate, has been specified as the place where it is incorporated or otherwise legally constituted. The usual place of residence of an individual is the place (country, state etc) where the individual spends most of his time for the period in question. It is likely to be the place where the individual has set up his home, or where he lives with his family or is in full time employment. Individuals are not treated as belonging in a country if they are short term, transitory visitors (for example if they are visiting as tourists, or to receive medical treatment or for a short term educational course). An individual cannot have more than one usual place of residence. In addition, in the case of telecommunication services, it has been prescribed that the usual place of residence of the receiver shall be the billing address. This in effect means the address that is available in the records of the service provider for billing the receiver of the 56 telecommunication service. This provision will be applicable to individual customers (generally referred to as subscribers) of a telecommunication service, who are provided a subscriber identification module (commonly referred to as SIM card, which may be post-paid or prepaid) and a unique identification number (10-digit or 8-digit, as the case may be) by the service provider. 5.3 Main Rule- Rule 3- Location of the Receiver 5.3.1 What is the implication of this Rule? The main rule or the default rule provides that a service shall be deemed to be provided where the receiver is located. The main rule is applied when none of the other later rules apply (by virtue of rule 14 governing the order of application of rules- see para 5.14 of this guidance paper). In other words, if a service is not covered by an exception under one of the later rules, and is consequently covered under this default rule, then the receiver’s location will determine whether the service is leviable to tax in the taxable territory. The principal effect of the Main Rule is that:- A. Where the location of receiver of a service is in the taxable territory, such service will be deemed to be provided in the taxable territory and service tax will be payable. B. However if the receiver is located outside the taxable territory, no service tax will be payable on the said service. 5.3.2 If the place of provision of a taxable service is the location of service receiver, who is the person liable to pay tax on the transaction? Service tax is normally required to be paid by the provider of a service, except where he is located outside the taxable territory and the place of provision of service is in the taxable territory. Where the provider of a service is located outside the taxable territory, the person liable to pay service tax is the receiver of the service in the taxable territory, unless of course, the service is otherwise exempted. Following illustration will make this clear:- 57 A company ABC provides a service to a receiver PQR, both located in the taxable territory. Since the location of the receiver is in the taxable territory, the service is taxable. Service tax liability will be discharged by ABC, being the service provider and being located in taxable territory. However, if ABC were to supply the same service to a recipient DEF located in non-taxable territory, the provision of such service is not taxable, since the receiver is located outside the taxable territory. If the same service were to be provided to PQR (located in taxable territory) by an overseas provider XYZ (located in non-taxable territory), the service would be taxable, since the recipient is located in the taxable territory. However, since the service provider is located in a nontaxable territory, the tax liability would be discharged by the receiver, under the reverse charge principle (also referred to as “tax shift”). 5.3.3 Who is the service receiver? Normally, the person who is legally entitled to receive a service and, therefore, obliged to make payment, is the receiver of a service, whether or not he actually makes the payment or someone else makes the payment on his behalf. Illustration A lady leaves her car at a service station for the purpose of servicing. She asks her chauffer to collect the car from the service station later in the day, after the servicing is over. The chauffer makes the payment on behalf of the lady owner and collects the car. Here the lady is the ‘person obliged to make the payment’ towards servicing charges, and therefore, she is the receiver of the service. 5.3.4 What would be the situation where the payment for a service is made at one location (say by the headquarters of a business) but the actual rendering of the service is elsewhere (i.e. a fixed establishment)? Occasionally, a person may be the person liable to make payment for the service provided on his behalf to another person. For instance, the provision of a service may be negotiated at the headquarters of an entity by way of centralized sourcing of services whereas the actual provision is made at various locations in different taxing jurisdictions (in the case of what is commonly referred to as a multi-locational entity or MLE). Here, the central office may act only as a facilitator to negotiate the contract on behalf of various geographical establishments. Each of the geographical establishments receives the service and is obligated to make the payment either through headquarters or sometimes directly. When the payment is made directly, there is no confusion. In other situations, where the payment is settled either by cash or through debit and credit note between the business and fixed establishments, it is clear that the payment is being made by a geographical location. Wherever a fixed establishment bears the cost of acquiring, or using or consuming a service through any internal arrangement (normally referred to as a “recharge”, “reallocation”, or a “settlement”), these are generally made in accordance with corporate tax or other statutory requirements. These accounting arrangements also invariably aid the MLE’s management in budgeting and financial performance measurement. 58 Various accounting and business management systems are generally employed to manage, monitor and document the entire purchasing cycle of goods and services (such as the ERPEnterprise Resource Planning System). These systems support and document the company processes, including the financial and accounting process, and purchasing process. Normally, these systems will provide the required information and audit trail to identify the establishment that uses or consumes a service. It should be noted that in terms of proviso to section 66B, the establishments in a taxable and non-taxable territory are to be treated as distinct persons. Moreover, the definition of “location of the receiver” clearly states that “where the services are “used” at more than one establishment, whether business or fixed, the establishment most directly concerned with the use of the service” will be the location. Thus, the taxing jurisdiction of service, which is provided under a ‘global framework agreement’ between two multinational companies with the business establishment located outside the taxable territory, but which is used or consumed by a fixed establishment located in the taxable territory, will be the taxable territory. Illustration The following example illustrates the above, by comparing the place of provision of services rendered under a Global Agreement1 vis-à-vis a Global Framework Agreement2. AAA is a firm with its manufacturing unit and business establishment located in the taxable territory A. It has got two other manufacturing plants located in countries X and Y (say, AAA-X and AAA-Y respectively). AAA wishes to obtain IT services for a new production process for its three manufacturing plants in the region. BBB is an IT firm located in the taxable territory (location of business establishment). BBB Ltd also has fixed establishments (subsidiaries) located in country X (say BBB-X) and in country Y (say, BBB- Y). AAA engages BBB for meeting its IT service requirement. Scenario 1 [See Flow Diagram F 2 at the end of this section] AAA enters into a Global (centralized purchasing) agreement with BBB for provision of IT services for the whole group. Following are the different transactions under which services are provided:- a) Under the global agreement, some component of IT service is provided by BBB to AAA in country A (say, Transaction 1). b) To meet the requirements of providing IT solutions specific to the plants AAA-X and AAA-Y in countries X and Y, BBB enters into agreements with its subsidiaries BBBX (in country X) and BBB-Y (in country Y), under which they provide IT services to 1 A ‘Global Contract or Agreement’ is between two parent companies for provision of services from one to the other, where actual provision of services is to be made to subordinate offices of the recipient company in different tax jurisdictions. 2 A ‘Global Framework Agreement’ is between two parent companies for provision of services, but here, the ‘framework agreement’ only specifies the broad terms of the agreement i.e. fees, terms and conditions, the list of recipient branches/offices or even the details of provision of services to be made. The subsidiaries in different locations then enter into separate and independent business agreements, for provision of services and payments. 59 BBB (say, Transaction 2 and Transaction 3). Though these services are provided by BBB-X and BBB-Y to BBB, these are rendered as under:- • By BBB-X to AAA-X (in country X)- under transaction 2, and • By BBB-Y to AAA-Y (in country-Y) – under transaction 3. c) AAA enters into separate agreements with AAA-X and AAA-Y, under which AAA Ltd provides IT services to them (transaction 4 and transaction 5). The transactions and provision of service under each are illustrated in the Flow diagram F2 titled ‘Scenario1’ at the end of this section. Scenario 2 [See Flow Diagram F 3 at the end of this section] AAA enters into a Framework Agreement with BBB for provision of IT services for the whole group. The Framework agreement covers the broad contours of supply between the two parties, payment milestones, obligations relating to confidentiality, penalty for default, limitations of liability and warranties etc, which would apply as and when group companies enter into separate agreements, in accordance with the terms envisaged in the framework agreement. BBB-X and BBB-Y could then enter into separate and independent business agreements with AAA-X and AAA-Y, in countries X and Y respectively, for provision of IT services. There are four agreements, but only three transactions involving provision of services, as indicated in the Flow diagram F3- Scenario 2 at the end of this section. 5.3.5 What is the place of provision where the location of receiver is not ascertainable in the ordinary course of business? Generally, in case of a service provided to a person who is in business, the provider of the service will have the location of the recipient’s registered location, or his business establishment, or his fixed establishment etc, as the case may be. However, in case of certain services (which are not covered by the exceptions to the main rule), the service provider may not have the location of the service receiver, in the ordinary course of his business. This will also be the case where a service is provided to an individual customer who comes to the premises of the service provider for availing the service and the provider has to, more often than not, rely on the declared location of the customer. In such cases the place of provision will be the location of the service provider. It may be noted that the service provider is not required to make any extraordinary efforts to trace the address of the service receiver. The address should be available in the ordinary course of business. In case of certain specified categories of services, the place of provision shall be the place where the services are actually performed. These are discussed in the following paragraphs. 5.4 Rule 4- Performance based Services 5.4.1 What are the services that are provided “in respect of goods that are made physically available, by the receiver to the service provider, in order to provide the service”?- sub-rule (1): Services that are related to goods, and which require such goods to be made available to the service provider or a person acting on behalf of the service provider so that the service can 60 be rendered, are covered here. The essential characteristic of a service to be covered under this rule is that the goods temporarily come into the physical possession or control of the service provider, and without this happening, the service cannot be rendered. Thus, the service involves movable objects or things that can be touched, felt or possessed. Examples of such services are repair, reconditioning, or any other work on goods (not amounting to manufacture), storage and warehousing, courier service, cargo handling service (loading, unloading, packing or unpacking of cargo), technical testing/inspection/certification/ analysis of goods, dry cleaning etc. It will not cover services where the supply of goods by the receiver is not material to the rendering of the service e.g. where a consultancy report commissioned by a person is given on a pen drive belonging to the customer. Similarly, provision of a market research service to a manufacturing firm for a consumer product (say, a new detergent) will not fall in this category, even if the market research firm is given say, 1000 nos. of 1 kilogram packets of the product by the manufacturer, to carry for door-to-door surveys. 5.4.2 What is the implication of the proviso to sub-rule (1)? The proviso to this rule states as follows:- “Provided further that where such services are provided from a remote location by way of electronic means, the place of provision shall be the location where goods are situated at the time of provision of service.” In the field of information technology, it is not uncommon to provide services in relation to tangible goods located distantly from a remote location. Thus the actual place of performance of the service could be quite different from the actual location of the tangible goods. This proviso requires that the place of provision shall be the actual location of the goods and not the place of performance, which in normal situations is one and the same. 5.4.3 What are the services that are provided “to an individual … which require the physical presence of the receiver … with the provider for provision of the service.”?- sub-rule (2) Certain services like cosmetic or plastic surgery, beauty treatment services, personal security service, health and fitness services, photography service (to individuals), internet café service, classroom teaching, are examples of services that require the presence of the individual receiver for their provision. As would be evident from these examples, the nature of services covered here is such as are rendered in person and in the receiver’s physical presence. Though these are generally rendered at the service provider’s premises (at a cosmetic or plastic surgery clinic, or beauty parlor, or health and fitness centre, or internet café), they could also be provided at the customer’s premises, or occasionally while the receiver is on the move (say, a personal security service; or a beauty treatment on board an aircraft). 5.4.4 What is the significance of “..in the physical presence of an individual, whether represented either as the service receiver or a person acting on behalf of the receiver” in this rule? This implies that while a service in this category is capable of being rendered only in the presence of an individual, it will not matter if, in terms of the contractual arrangement between the provider and the receiver (formal or informal, written or oral), the service is actually rendered by the provider to a person other than the receiver, who is acting on behalf of the receiver. 61 Illustration A modelling agency contracts with a beauty parlour for beauty treatment of say, 20 models. Here again is a situation where the modelling agency is the receiver of the service, but the service is rendered to the models, who are receiving the beauty treatment service on behalf of the modelling agency. Hence, notwithstanding that the modelling agency does not qualify as the individual receiver in whose presence the service is rendered, the nature of the service is such as can be rendered only to an individual, thereby qualifying to be covered under this rule. 5.5 Rule 5- Location of Immovable Property In the case of a service that is ‘directly in relation to immovable property’, the place of provision is where the immovable property (land or building) is located, irrespective of where the provider or receiver is located. 5.5.1 What is “immovable property”? “Immovable Property” has not been defined in the Finance Act, 1994. However, in terms of section 4 of the General Clauses Act, 1897, the definition of immovable property provided in sub-section 3 (26) of the General Clauses Act will apply, which states as under: “Immovable Property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.” It may be noted that the definition is inclusive and thus properties such as buildings and fixed structures on land would be covered by the definition of immovable property. The property must be attached to some part of earth even if underwater. 5.5.2 What are the criteria to determine if a service is ‘directly in relation to’ immovable property located in taxable territory? Generally, the following criteria will be used to determine if a service is in respect of immovable property located in the taxable territory: i) The service consists of lease, or a right of use, occupation, enjoyment or exploitation of an immovable property; ii) the service is physically performed or agreed to be performed on an immovable property (e.g. maintenance) or property to come into existence (e.g. construction); iii) the direct object of the service is the immovable property in the sense that the service enhances the value of the property, affects the nature of the property, relates to preparing the property for development or redevelopment or the environment within the limits of the property (e.g. engineering, architectural services, surveying and sub-dividing, management services, security services etc); iv) the purpose of the service is: 62 a) the transfer or conveyance of the property or the proposed transfer or conveyance of the property (e.g., real estate services in relation to the actual or proposed acquisition, lease or rental of property, legal services rendered to the owner or beneficiary or potential owner or beneficiary of property as a result of a will or testament); b) the determination of the title to the property. There must be more than a mere indirect or incidental connection between a service provided in relation to an immovable property, and the underlying immovable property. For example, a legal firm’s general opinion with respect to the capital gains tax liability arising from the sale of a commercial property in India is basically advice on taxation legislation in general even though it relates to the subject of an immovable property. This will not be treated as a service in respect of the immovable property. 5.5.3 Examples of land-related services i) Services supplied in the course of construction, reconstruction, alteration, demolition, repair or maintenance (including painting and decorating) of any building or civil engineering work; ii) Renting of immovable property; iii) Services of real estate agents, auctioneers, architects, engineers and similar experts or professional people, relating to land, buildings or civil engineering works. This includes the management, survey or valuation of property by a solicitor, surveyor or loss adjuster. iv) Services connected with oil/gas/mineral exploration or exploitation relating to specific sites of land or the seabed. v) The surveying (such as seismic, geological or geomagnetic) of land or seabed. vi) Legal services such as dealing with applications for planning permission. vii) Packages of property management services which may include rent collection, arranging repairs and the maintenance of financial accounts. viii) The supply of hotel accommodation or warehouse space. 5.5.4 What if a service is not directly related to immovable property? The place of provision of services rule applies only to services which relate directly to specific sites of land or property. In other words, the immovable property must be clearly identifiable to be the one from where, or in respect of which, a service is being provided. Thus, there needs to be a very close link or association between the service and the immovable property. Needless to say, this rule does not apply if a provision of service has only an indirect connection with the immovable property, or if the service is only an incidental component of a more comprehensive supply of services. 63 For example, the services of an architect contracted to design the landscaping of a particular resort hotel in Goa would be land-related. However, if an interior decorator is engaged by a retail chain to design a common décor for all its stores in India, this service would not be landrelated. The default rule i.e. Rule 3 will apply in this case. 5.5.5 Examples of services which are not land-related i) Repair and maintenance of machinery which is not permanently installed. This is a service related to goods. ii) Advice or information relating to land prices or property markets because they do not relate to specific sites. iii) Land or Real Estate Feasibility studies, say in respect of the investment potential of a developing suburb, since this service does not relate to a specific property or site. iv) Services of a Tax Return Preparer in simply calculating a tax return from figures provided by a business in respect of rental income from commercial property. v) Services of an agent who arranges finance for the purchase of a property. 5.6 Rule 6- Services relating to Events 5.6.1 What is the place of provision of services relating to events? Place of provision of services provided by way of admission to, or organization of a cultural, artistic, sporting, scientific, educational, entertainment event, or a celebration, conference, fair, exhibition, or any other similar event and of services ancillary to such admission, shall be the place where the event is held. 5.6.2 What are the services that will be covered in this category? Services in relation to admission as well as organization of events such as conventions, conferences, exhibitions, fairs, seminars, workshops, weddings, sports and cultural events are covered under this Rule. Illustration 1 A management school located in USA intends to organize a road show in Mumbai and New Delhi for prospective students. Any service provided by an event manager, or the right to entry (participation fee for prospective students, say) will be taxable in India. Illustration 2 An Indian fashion design firm hosts a show at Toronto, Canada. The firm receives the services of a Canadian event organizer. The place of provision of this service is the location of the event, which is outside the taxable territory. Any service provided in relation to this event, including the right to entry, will be non-taxable. 64 5.6.3 What is a service ancillary organization or admission to an event? Provision of sound engineering for an artistic event is a prerequisite for staging of that event and should be regarded as a service ancillary to its organization. A service of hiring a specific equipment to enjoy the event at the venue (against a charge that is not included in the price of entry ticket) is an example of a service that is ancillary to admission. 5.6.4 What are event-related services that would be treated as not ancillary to admission to an event? A service of courier agency used for distribution of entry tickets for an event is a service that is not ancillary to admission to the event. 5.7 Rule 7- Part performance of a service at different locations 5.7.1 What does this Rule imply? This Rule covers situations where the actual performance of a service is at more than one location, and occasionally one (or more) such locations may be outside the taxable territory. This Rule states as follows:- “Where any service stated in rules 4, 5, or 6 is provided at more than one location, including a location in the taxable territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is provided”. The following example illustrates the application of this Rule:- Illustration 1 An Indian firm provides a ‘technical inspection and certification service’ for a newly developed product of an overseas firm (say, for a newly launched motorbike which has to meet emission standards in different states or countries). Say, the testing is carried out in Maharashtra (20%), Kerala (25%), and an international location (say, Colombo 55%). Notwithstanding the fact that the greatest proportion of service is outside the taxable territory, the place of provision will be the place in the taxable territory where the greatest proportion of service is provided, in this case Kerala. This rule is, however, not intended to capture insignificant portion of a service rendered in any part of the taxable territory like mere issue of invoice, processing of purchase order or recovery, which are not by way of service actually performed on goods. It is clarified that this rule is applicable in performance-based services or location-specific services (immovable property related or event-linked). Normally, such services when provided in a non-taxable territory would require the presence of separate establishments in such territories. By virtue of an explanation of sub-clause (44) of section 65B, they would constitute distinct persons and thus it would be legitimate to invoice the services rendered individually in the two territories. 65 5.8 Rule 8- Services where the Provider as well as Receiver is located in Taxable Territory 5.8.1 What is the place of provision of a service where the location of the service provider and that of the service receiver is in the taxable territory? The place of provision of a service, which is provided by a provider located in the taxable territory to a receiver who is also in the taxable territory, will be the location of the receiver. 5.8.2 What is the implication of this Rule? This Rule covers situations where the place of provision of a service provided in the taxable territory may be determinable to be outside the taxable territory, in terms of the application of one of the earlier Rules i.e. Rule 4 to 6, but the service provider, as well as the service receiver, are located in the taxable territory. The implication of this Rule is that in all such cases, the place of provision will be deemed to be in the taxable territory, notwithstanding the earlier rules. The presence of both the service provider and the service receiver in the taxable territory indicates that the place of consumption of the service is in the taxable territory. Services rendered, where both the provider and receiver of the service are located outside the taxable territory, are now covered by the mega exemption. Illustration A helicopter of Pawan Hans Ltd (India based) develops a technical snag in Nepal. Say, engineers are deputed by Hindustan Aeronautics Ltd, Bangalore, to undertake repairs at the site in Nepal. But for this rule, Rule 4, sub-rule (1) would apply in this case, and the place of provision would be Nepal i.e. outside the taxable territory. However, by application of Rule 7, since the service provider, as well as the receiver, are located in the taxable territory, the place of provision of this service will be within the taxable territory. 5.9 Rule 9- Specified services- Place of provision is location of the service provider 5.9.1 What are the specified services where the place of provision is the location of the service provider? Following are the specified services where the place of provision is the location of the service provider:- i) Services provided by a banking company, or a financial company, or a non-banking financial company to account holders; ii) Online information and database access or retrieval services; iii) Intermediary services; iv) Service consisting of hiring of means of transport, up to a period of one month. 66 5.9.2 What is the meaning of “account holder”? Which accounts are not covered by this rule? “Account” has been defined in the rules to mean an account which bears an interest to the depositor. Services provided to holders of demand deposits, term deposits, NRE (non-resident external) accounts and NRO (non-resident ordinary) accounts will be covered under this rule. Banking services provided to persons other than account holders will be covered under the main rule (Rule 3- location of receiver). 5.9.3 What are the services that are provided by a banking company to an account holder (holder of an account bearing interest to the depositor)? Following are examples of services that are provided by a banking company or financial institution to an “account holder”, in the ordinary course of business:- i) services linked to or requiring opening and operation of bank accounts such as lending, deposits, safe deposit locker etc; ii) transfer of money including telegraphic transfer, mail transfer, electronic transfer etc. 5.9.4 What are the services that are not provided by a banking company or financial institution to an account holder, in the ordinary course of business, and will consequently be covered under another Rule? Following are examples of services that are generally NOT provided by a banking company or financial institution to an account holder (holder of a deposit account bearing interest), in the ordinary course of business:- i) financial leasing services including equipment leasing and hire-purchase; ii) merchant banking services; iii) Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing; iv) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services; v) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; vi) banker to an issue service. In the case of any service which does not qualify as a service provided to an account holder, the place of provision will be determined under the default rule i.e. the Main Rule 3. Thus, it will be the location of the service receiver where it is known (ascertainable in the ordinary course of business), and the location of the service provider otherwise. 67 5.9.5 What are “Online information and database access or retrieval services”? “Online information and database access or retrieval services” are services in relation to online information and database access or retrieval or both, in electronic form through computer network, in any manner. Thus, these services are essentially delivered over the internet or an electronic network which relies on the internet or similar network for their provision. The other important feature of these services is that they are completely automated, and require minimal human intervention. Examples of such services are:- i) online information generated automatically by software from specific data input by the customer, such as web-based services providing trade statistics, legal and financial data, matrimonial services, social networking sites; ii) digitized content of books and other electronic publications, subscription of online newspapers and journals, online news, flight information and weather reports; iii) Web-based services providing access or download of digital content. The following services will not be treated as “online information and database access or retrieval services”:- i) Sale or purchase of goods, articles etc over the internet; ii) Telecommunication services provided over the internet, including fax, telephony, audio conferencing, and videoconferencing; iii) A service which is rendered over the internet, such as an architectural drawing, or management consultancy through e-mail; iv) Repair of software, or of hardware, through the internet, from a remote location; v) Internet backbone services and internet access services. 5.9.6 What are “Intermediary Services”? Generally, an “intermediary” is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two supplies at any one time: i) the supply between the principal and the third party; and ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged. For the purpose of this rule, an intermediary in respect of goods (such as a commission agent i.e. a buying or selling agent, or a stockbroker) is excluded by definition. Also excluded from this sub-rule is a person who arranges or facilitates a provision of a service (referred to in the rules as “the main service”), but provides the main service on his own account. 68 In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered:- Nature and value: An intermediary cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back to the principal. Separation of value: The value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as “commission”. Identity and title: The service provided by the intermediary on behalf of the principal is clearly identifiable. In accordance with the above guiding principles, services provided by the following persons will qualify as ‘intermediary services’:- i) Travel Agent (any mode of travel) ii) Tour Operator iii) Commission agent for a service [an agent for buying or selling of goods is excluded] iv) Recovery Agent Even in other cases, wherever a provider of any service acts as an intermediary for another person, as identified by the guiding principles outlined above, this rule will apply. Normally, it is expected that the intermediary or agent would have documentary evidence authorizing him to act on behalf of the provider of the ‘main service’. Illustration A freight forwarder arranges for export and import shipments. There could be two possible situations here- one when he acts on his own account, and the other, when he acts as an intermediary. When the freight forwarder acts on his own account (say, for an export shipment) A freight forwarder provides domestic transportation within taxable territory (say, from the exporter’s factory located in Pune to Mumbai port) as well as international freight service (say, from Mumbai port to the international destination), under a single contract, on his own account (i.e. he buys-in and sells fright transport as a principal), and charges a consolidated amount to the exporter. This is a service of transportation of goods for which the place of supply is the destination of goods. Since the destination of goods is outside taxable territory, this service will not attract service tax. Here, it is presumed that ancillary freight services (i.e. services ancillary to transportation- loading, unloading, handling etc) are “bundled” with the principal service owing to a single contract or a single price (consideration). 69 On an import shipment with similar conditions, the place of supply will be in the taxable territory, and so the service tax will be attracted. When the freight forwarder acts as an intermediary Where the freight forwarder acts as an intermediary, the place of provision will be his location. Service tax will be payable on the services provided by him. However, when he provides a service to an exporter of goods, the exporter can claim refund of service tax paid under notification for this purpose. Similarly, persons such as call centres, who provide services to their clients by dealing with the customers of the client on the client’s behalf, but actually provided these services on their own account, will not be categorized as intermediaries. 5.9.7 What is the service of “hiring of means of transport”? The services of providing a hire or lease, without the transfer of right to use (explained in guide at point 6.6), is covered by this rule. Normally the following will constitute means of transport:- i) Land vehicles such as motorcars, buses, trucks; ii) Vessels; iii) Aircraft; iv) Vehicles designed specifically for the transport of sick or injured persons; v) Mechanically or electronically propelled invalid carriages; vi) Trailers, semi-trailers and railway wagons. The following are not ‘means of transport’:- i) Racing cars; ii) Containers used to store or carry goods while being transported; iii) Dredgers, or the like. 5.9.8 What if I provide a service of hiring of a fleet of cars to a company on an annual contract? What will be place of provision of my service if my business establishment is located in New Delhi, and the company is located in Faridabad (Haryana)? This Rule covers situations where the hiring is for a period of upto one month. Since hiring period is more than one month, this sub-rule cannot be applied to the situation. The place of provision of your service will be determined in terms of Rule 3 i.e. receiver location, which in this case is Faridabad (Haryana). 5.10 Rule 10- Place of Provision of a service of transportation of goods 5.10.1 What are the services covered under this Rule? Any service of transportation of goods, by any mode of transport (air, vessel, rail or by a goods transportation agency), is covered here. However, transportation of goods by courier or mail is not covered here. 70 5.10.2 What is the place of provision of a service of transportation of goods? Place of provision of a service of transportation of goods is the place of destination of goods, except in the case of services provided by a Goods Transportation Agency in respect of transportation of goods by road, in which case the place of provision is the location of the person liable to pay tax (as determined in terms of rule 2(1)(d) of Service Tax Rules, 1994 (since amended). Illustration A consignment of cut flowers is consigned from Chennai to Amsterdam. The place of provision of goods transportation service will be Amsterdam (outside India, hence not liable to service tax). Conversely, if a consignment of crystal ware is consigned from Paris to New Delhi, the place of provision will be New Delhi. 5.10.3 What does the proviso to this Rule imply? The proviso to this Rule states as under:- “Provided that the place of provision of services of transportation of goods by goods transportation agency shall be the location of the person liable to pay tax.” Sub-rule 2(1)(d) of Service Tax Rules, 1994 provides that where a service of transportation of goods is provided by a ‘goods transportation agency’, and the consignor or consignee is covered under any of the specified categories prescribed therein , the person liable to tax is the person who pays, or is liable to pay freight (either himself or through his agent) for the transportation of goods by road in a goods carriage. If such person is located in non-taxable territory, then the person liable to pay tax shall be the service provider. Illustration 1 A goods transportation agency ABC located in Delhi transports a consignment of new motorcycles from the factory of XYZ in Gurgaon (Haryana), to the premises of a dealer in Bhopal, Madhya Pradesh. Say, XYZ is a registered assessee and is also the person liable to pay freight and hence person liable to pay tax, in this case. Here, the place of provision of the service of transportation of goods will be the location of XYZ i.e. Haryana. Illustration 2 A goods transportation agency ABC located in Delhi transports a consignment of new motorcycles from the factory of XYZ in Gurgaon (Haryana), to the premises of a dealer in Jammu (non-taxable territory). Say, as per mutually agreed terms between ABC and XYZ, the dealer in Jammu is the person liable to pay freight. Here, in terms of amended provisions of rule 2(1)(d), since the person liable to pay freight is located in non-taxable territory, the person liable to pay tax will be ABC. Accordingly, the place of provision of the service of transportation of goods will be the location of ABC i.e. Delhi. 71 5.11 Rule 11- Passenger Transportation Services 5.11.1 What is the place of provision of passenger transportation services? The place of provision of a passenger transportation service is the place where the passenger embarks on the conveyance for a continuous journey. 5.11.2 What does a “continuous journey” mean? A “continuous journey” means a journey for which:- (i) a single ticket has been issued for the entire journey; or (ii) more than one ticket or invoice has been issued for the journey, by one service provider, or by an agent on behalf of more than one service providers, at the same time, and there is no scheduled stopover in the journey 5.11.3 What is the meaning of a stopover? Do all stopovers break a continuous journey? “Stopover” means a place where a passenger can disembark either to transfer to another conveyance or break his journey for a certain period in order to resume it at a later point of time. All stopovers do not cause a break in continuous journey. Only such stopovers will be relevant for which one or more separate tickets are issued. Thus a travel on Delhi-London- New York-London-Delhi on a single ticket with a halt at London on either side, or even both, will be covered by the definition of continuous journey. However if a separate ticket is issued, say New York-Boston-New York, the same will be outside the scope of a continuous journey. 5.11.4 The Table below contains illustrations which explain the principle enunciated in this Rule. Illustrations S. No. Journey Place of Provision Taxability Single Ticket (No stopover) 1 Mumbai-Delhi Mumbai Yes, Mumbai being the place of embarkation. 2 Mumbai-Delhi-Jaipur Mumbai Yes, Mumbai, being the place of embarkation for the continuous journey. 3 Mumbai-Delhi-London- Mumbai -do- Delhi-London 4 Delhi-London-New York- Delhi Yes, New Delhi, being the place London-New York of provision for continuous journey with single return ticket. 5 Delhi-London-New York Delhi -do- 6 New York-London-Delhi New York No, New York is place of provision for continuous journey with single return ticket. 72 S. No. Journey Place of Provision Taxability 7 New York-London-Delhi- New York -do- Mumbai-Delhi-London- New York 8 Delhi-Jammu-Delhi Delhi Yes, Delhi is the place of provision for continuous journey. 9 Jammu-Delhi-Jammu Jammu No, Jammu is the place of provision for continuous journey with single return ticket More than one ticket for a journey (issued by a single service provider, or by a single agent, for more than one service providers) 1 (a) Delhi-Bangkok-Delhi Delhi is place of Journey (a) is taxable since place of (b) Bangkok-Bali-Bangkok provision for journey provision is in taxable territory;Journey (a); Bangkok is place (b) is not taxable since place of of provision for journey provision is outside taxable territory. (b) 2 (a) Delhi-New York-Delhi Delhi is place of Journey (a) is taxable since place of (b) New York-Boston- provision for journey provision is in taxable territory; New York (a); New York is place Journey (b) is not taxable since place of provision for journey of provision is not in taxable territory. (b) 3 (a) London-Delhi-London London is place of Journey (a) is not taxable since place (b)Delhi-Chandigarh provision for journey of provision is outside taxable territory; (c) Chandigarh-Amritsar (a); Delhi is place of Journeys (b), (c) and (d) are taxable (d) Amritsar-Delhi provision for journey since place of provision is in taxable (b); Chandigarh is place territory. of provision for journey (c); Amritsar is place of provision for journey (d) 4 (a) Delhi-Jammu Delhi is place of provision Journey (a)is taxable since (b) Jammu-Delhi for journey (a)Jammu is place of provision is in taxable place of provision for territory. journey (b) Journey (b) is not taxable since place of provision is outside taxable territory. 5 (a) Jammu-Delhi-Jammu Jammu is place of Journey (a) is not taxable since place (b) Delhi-Bangkok-Delhi provision for journey of provision is outside taxable territory (a); Delhi is place of for the continuous journey with single, provision for journey return ticket.Journey (b) is taxable, (b) since place of provision is in taxable territory for the journey with single, return ticket. 6 (a) Jammu-Delhi Jammu is place of Journey (a) is not taxable since place (b) Delhi-Bangkok-Delhi provision for journey of provision is not in taxable territory; (c) Delhi-Lucknow (a); Delhi is place of Journeys (b), (c) and (d) are taxable (d) Lucknow-Jammu provision for journey since place of provision is in taxable (b); Delhi is place of territory for each of these. provision for journey (c); Lucknow is place of provision for journey (d) 73 It may also be pertinent to mention that for flights originating from, or terminating in, the northeast region, though the place of provision will be determined in terms of this rule, there is an exemption for air transportation of passengers, embarking from, or terminating in an airport located in the state of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Bagdogra located in West Bengal. The examples in the table below illustrate some situations. S. No. Journey Place of Provision Taxability Single ticket (No stopover) 1 Dibrugarh-Kolkata-Mumbai Dibrugarh is the place Journey is taxable, but no service tax of provision is payable owing to the exemption. 2 Dibrugarh-Kolkata-Mumbai- Dibrugarh is the place Journey is taxable, but no service tax Kolkata-Dibrugrah of provision is payable owing to the exemption. Here it is relevant to note that the journey is against a single, return ticket. 3 Guwahati-Kolkata-Bangkok- Guwahati is the place Place of provision being in the taxable Kolkata-Guwahati of provision for the territory, the service is taxable, but no continuous journey service tax is payable owing to the exemption and journey is deemed continuous. 4 Kolkata-Guwahati-Kolkata Kolkata is the place of Place of provision being in the taxable provision for the territory, the service is taxable, but no continuous journey. service tax is payable owing to the exemption (the onward and return legs of journey terminate and originate in exempted territory respectively). More than one ticket for a journey (issued by a single service provider, or by a single agent, for more than one service providers) 1 (a) Bagdogra-Kolkata Place of provision for In these cases, generally, the (b) Kolkata-Delhi journey (a) is Bagdogra. passenger would be required to change Place of provision for aircraft after exiting the airport, and is journey (b) is Kolkata. required to obtain a fresh boarding pass for the next leg. This is deemed to be a stopover. Thus, journey (b) is taxable, and service tax is payable on leg (b). 2 (a) Guwahati-Kolkata- Each journey is deemed Generally, in such cases, since Guwahati continuous based on the separate return tickets have been (b) Kolkata-Bangkok-Kolkata assumption that two purchased for the two journeys, single return tickets are after completing journey (a) the purchased. For journey passenger will be required to (a) place of provision is disembark from the aircraft and Guwahati, and for journey complete check-in formalities for (b) place of provision is journey (b). Thus, the journey will not Kolkata. be deemed to be continuous and place of provision for journey (b) will be Kolkata. 74 5.12 Rule 12- Services provided on board conveyances 5.12.1 What are services provided on board conveyances? Any service provided on board a conveyance (aircraft, vessel, rail, or roadways bus) will be covered here. Some examples are on-board service of movies/music/video/ software games on demand, beauty treatment etc, albeit only when provided against a specific charge, and not supplied as part of the fare. 5.12.2 What is the place of provision of services provided on board conveyances? The place of provision of services provided on board a conveyance during the course of a passenger transport operation is the first scheduled point of departure of that conveyance for the journey. Illustration A video game or a movie-on-demand is provided as on-board entertainment during the Kolkata-Delhi leg of a Bangkok-Kolkata-Delhi flight. The place of provision of this service will be Bangkok (outside taxable territory, hence not liable to tax). If the above service is provided on a Delhi-Kolkata-Bangkok-Jakarta flight during the Bangkok-Jakarta leg, then the place of provision will be Delhi (in the taxable territory, hence liable to tax). 5.13 Rule 13- Power to notify services or circumstances 5.13.1 What is the implication of this Rule? This Rule states as follows:- “In order to prevent double taxation or non-taxation of the provision of a service, or for the uniform application of rules, the Central Government shall have the power to notify any description of service or circumstances in which the place of provision shall be the place of effective use and enjoyment of a service.” The rule is an enabling power to correct any injustice being met due to the applicability of rules in a foreign territory in a manner which is inconsistent with these rules leading to double taxation. Due to the cross border nature of many services it is also possible in certain situations to set up businesses in a non-taxable territory while the effective enjoyment, or in other words consumption, may be in taxable territory. This rule is also meant as an anti-avoidance measure where the intent of the law is sought to be defeated through ingenious practices unknown to the ordinary ways of conducting business. 5.14 Rule 14- Order of application of Rules 5.14.1 What is the implication of this Rule? Rule 14 provides that where the provision of a service is, prima facie, determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration. 75 This Rule covers situations where the nature of a service, or the business activities of the service provider, may be such that two or more rules may appear equally applicable. Following illustrations will make the implications of this Rule clear:- Illustration 1 An architect based in Mumbai provides his service to an Indian Hotel Chain (which has business establishment in New Delhi) for its newly acquired property in Dubai. If Rule 5 (Property rule) were to be applied, the place of provision would be the location of the property i.e. Dubai (outside the taxable territory). With this result, the service would not be taxable in India. Whereas, by application of Rule 8, since both the provider and the receiver are located in taxable territory, the place of provision would be the location of the service receiver i.e. New Delhi. Place of provision being in the taxable territory, the service would be taxable in India. By application of Rule 14, the later of the Rules i.e. Rule 8 would be applied to determine the place of provision. Illustration 2 For the Ms Universe Contest planned to be held in South Africa, the Indian pageant (say, located in Mumbai) avails the services of Indian beauticians, fashion designers, videographers, and photographers. The service providers travel as part of the Indian pageant’s entourage to South Africa. Some of these services are in the nature of personalized services, for which the place of provision would normally be the location where performed (Performance rule-Rule 4), while for others, under the main rule (Receiver location) the place of provision would be the location of receiver. Whereas, by application of Rule 8, since both the provider and the receiver are located in taxable territory, the place of provision would be the location of the service receiver i.e. New Delhi. Place of provision being in the taxable territory, the service would be taxable in India. By application of Rule 15, the later of the Rules i.e. Rule 8 would be applied to determine the place of provision. ***** 76 FLOW DIAGRAM F1 (Refer para 5.2.4) HOW TO DETERMINE LOCATION? 77 FLOW DIAGRAM F 2 (Refer para 5.3.4) PROVISION OF SERVICES UNDER A ‘GLOBAL AGREEMENT’- Scenario 1 78 FLOW DIAGRAM F 3 (Refer para 5.3.4) PROVISION OF SERVICES UNDER ‘FRAMEWORK AGREEMENT’- Scenario 2 Agreement 1 is not transactional, has no consideration, and does not create a provision of service. Agreement 1 stipulates the terms and conditions which are activated only when the parties (i.e. group subsidiaries on either side enter into separate and independent business agreements, in accordance with the terms specified in the framework agreement. Under Agreement 2, service 1 is provided by BBB Ltd to AAA Ltd, and the place of provision of this service, under the main rule, is the location of the receiver i.e. within the taxable territory. Under Agreement 3, service 2 is provided by BBB-X to AAA-X, and the place of provision of this service, under the main rule, is country X i.e. outside the taxable territory. Under Agreement 4, service 3 is provided by BBB-Y to AAA-Y, and the place of provision of this service, again under the main rule, is country Y i.e. outside the taxable territory. _____________________________________________________________________