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No tax on imported services before Apr 06
February, 07th 2009

In what could well be a first definitive judgement by a high court on the issue of service tax on imported services, the Bombay High
Court has held that service recipients residing in India were not liable to pay service tax on services rendered by a non-resident service provider prior to April 18, 2006.

The ruling was recently delivered in a dispute between the Indian National Shipowners Association (INSA) and Union of India. INSAs claim hinged on the fact that up to April 2006, the government had not extended the service tax legislation beyond the jurisdiction of India despite frequent amendments to the Finance Act, 1994, which provides for the levy of service tax.

INSA was represented by tax law firm Economic Laws Practice (ELP). The INSA members, who are owners of Indian vessels, were asked to pay service tax from March 2002, when the reverse charge mechanism for collecting service tax from residents was introduced. INSA contended that services to member vessels were rendered outside India and thus fell beyond the jurisdiction of the Finance Act.

In April 2006, the government amended the Finance Act to extend the service tax to anyone receiving services from outside the country. As per the new provision, Section 66-A, services provided by anyone from outside to an individual in India would be deemed as services provided by the recipient in India in case the service qualifies as being imported into India. And the service recipients were liable to pay service tax on such services. Further, the Taxation of Services (provided from outside India and received in India) Rules, 2006 (Import Rules), were introduced with effect from April 19, 2006, to determine whether a service qualified as being imported into India based on the prescribed criteria for taxable service categories.

The HC observed that before the enactment of Section 66-A, there was no authority vested by law in the respondents including the Union of India and Central Board of Excise & Customs to levy service tax on a person residing in India, but receiving services outside. In other words, it is only after the enactment of Section 66-A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider, the HC noted in its judgement.

The court restrained the respondents from levying service tax on INSA members from March 1, 2002, to April 17, 2006, in relation to services received by vessels and ships belonging to the members of the petitioners association (INSA) outside India, from persons who are non-resident.

The services received by shipowners outside India include custom house agents services, steamer agents services, cargo-handling services, maintenance and repair services, banking and other financial services, and telegraph services.

The INSA judgement puts to rest the old controversy in relation to applicability of tax on services rendered outside India by a foreign resident to an Indian resident prior to April 2006. After April 2006, the Indian service recipients would have to pay service tax on the services provided by foreign residents on services received in India, said Uday Pimprikar of Ernst & Young.

The detailed HC judgement will lead to a positive resolution of pending disputes involving substantial tax amounts in relation to imported services, said Rohit Jain of ELP.

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