Charging of service tax, or VAT for that matter, from the recipient of a service where the service is provided by a non-resident is a well accepted international practice under the reverse charge or tax shift mechanism. Internationally, the reverse charge is applied in the context of import of services. In India too, the reverse charge mechanism has been introduced in phases. Initially, it was introduced in the context of specified services rendered in India. Thereafter, it was introduced in the context of services rendered by non-residents in India not having an Indian presence and, finally, it was extended to the import of services in India.
The relevant date for the applicability of the reverse charge, both in the context of services rendered by non-residents in India as well as for services rendered by non-residents from outside India and received in India, as imports of services, has been a contentious issue. In the previous article, the issue of applicability of the reverse charge mechanism with regard to services rendered by non-residents in India was discussed. The judgement of the Tribunal in the case of Hindustan Zinc Ltd. Vs. CCE (2008 VIL-18) has settled this particular matter and, accordingly, the relevant date for applicability of the reverse charge in relation thereto is the January 1, 2005.
This article addresses the related issue of the date of applicability of the reverse charge mechanism to services rendered by non-residents from outside India and received in India-* as imports of services. The principle of taxation of imports of services was initially introduced in service tax law with effect from June 2005, by means of insertion of an Explanation to the erstwhile Section 65(105) of the Finance Act, 1994. This Explanation was further supported by the then Rule 2(1)(d)(iv) of the Service Tax Rules, which stated that in relation to any taxable service provided by a non-resident, the Indian resident who received the service would be required to pay the tax.
The above Explanation envisaged that all services received from a foreign service provider anywhere in the world, by a recipient located in India, would be chargeable to the tax, regardless of whether the services were in fact received in India. This Explanation was inserted in Section 65(105) even though charging Section 64 of the Act envisaged the taxation of only those services that were provided in India and not those that were provided elsewhere and received in India.
Indeed, the issue with regard to the extra territorial jurisdiction of the tax, assumed by way of insertion of this Explanation, is even now a matter of judicial debate. Also, the creation of the charge of the tax, through insertion of an Explanation is legally suspect. The Honble Supreme Court, in the case of Sulochana Amma v Narayanan Nair (1995, 77 ELT 785), had held that it is settled law that an explanation to a section is not a substantive provision by itself. It is entitled to explain the meaning of the words contained in the section or to clarify certain ambiguities or clear them up.
It becomes a part and parcel of the enactment. Its meaning must depend upon its terms. Therefore, the explanation normally should be so read to harmonise with and to clear up any ambiguity in the same section. Thus, the legality of the Explanation in creating a tax charge on import of services in India is doubtful.
Realising the problem posed by the unsatisfactory manner of introduction of the tax on import of services, the government deleted the aforesaid Explanation with effect from 18/4/2006 and introduced new Section 66A, to govern the taxation of imports of services. Concomitantly, the Taxation (of Services Provided from Outside India and Received in India) Rules 2006 (hereinafter called the Import Rules) were brought into force from 19/4/06. These Rules categorize the taxable services into i) those relating to immoveable property, ii) those requiring performance within or without the taxing jurisdiction and iii) a residual category which covers all of the other taxable services.
A service is considered as an import, based on the criteria provided in the Import Rules in reference to the category under which the service is covered. Once a service is considered as an import, as above, the reverse charge mechanism is applied in terms of the present Rule 2(1)(d)(iv) of the Service Tax Rules, which states that in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India, the recipient of such a service is liable to pay the service tax, under Section 66A of the Act.
The position is thus clear as to the applicability of the reverse charge in the context of import of services after 18th April 2006. However, the issue of the applicability of the reverse charge on imports for the period from 16th June 2005 to 18th April 2006 has been a debatable one, for the reasons stated above.
In this regard, the decision of the Tribunal in Foster Wheeler Energy Ltd. Vs. C.C.EX. (2007 (7) S.T.R. 443) is relevant. It clearly holds that import of services are taxable in India with effect from 18/4/2006, on a reverse charge basis, and that, by implication, service tax is not payable on imports of services during an earlier period. This decision has been subsequently followed in other judgements of the Tribunal. However, none of these judgements have expressly dealt with the issue of the applicability of the erstwhile Explanation.
The recent judgement in the case of Hindustan Zinc (supra) does however take cognizance of both the erstwhile Explanation to Section 65(105) as well as Section 66A. It states that the Explanation was a temporary measure to tax imports of services and was subsequently replaced by Section 66A. In this part of the judgement, the inference is that the Explanation, albeit temporary, was a valid piece of law. However, in another part of the judgement, where again Section 66A is referred, it is stated that with the insertion of this Section, the dispute on taxability of imports of services has come to an end. There is evidently a contradiction here and a clear judgement on the matter is awaited.
It is however the more judicious view, especially in the light of Foster Wheeler, that the reverse charge on import of services is effective from April 2006 and not earlier.