Import of services is liable to service tax

FOREIGN ENTERPRISES

Until the introduction of the Finance Act, 2005, the legal position was that services provided beyond the territorial waters of India were not liable to the service tax. Circular No 36|4|2001 of October 8, 2001 clarified that services provided beyond the territorial waters of India were not liable to the service tax as provisions of the service tax had not been extended to such areas, so far.

But the Finance Act, 2005 brought a major amendment to Section 65(105) by inserting the following explanation:

"For the removal of doubt, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India such service shall be deemed to be taxable service for the purposes of this clause".

Thus services provided from outside India were also brought in the service tax net from June 16, 2005. Serious doubts have been raised regarding the constitutional validity of the above provision in terms of the same being against the territorial jurisdiction of India.

Ignoring the judicial uncertainty, now the Finance Bill 2006 proposes to insert a new Section 66A to fortify the Explanation inserted earlier. Under the proposed new section, services provided by a person who has fixed establishment outside India to a person who has a place of business in India are sought to be made liable to the service tax.

Wording of the above provision are so wide that the provision of the service tax may also cover any payment made by an individual/company being a resident of India for any taxable services rendered to it outside India. This creates an absolutely unintended absurdity.

Wrote jurist N Palkhiwala in the context of Section 9 of the Income Tax Act, "If Parliament can cast the net wide enough to collect tax in such cases, where the foreigner's income has no nexus with India, only because the income is derived from a transaction with an Indian, it can equally levy a tax on a hotel in a foreign country where an Indian goes to stay or dine, or on a foreign store where an Indian buys shirts or grocery, or on a foreign physician whose services are sought by an Indian while abroad".

The new section also provides that where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.

Significance of this provision lies in that even if the same legal entity owns a permanent establishment outside India as well as a permanent establishment in India, the said two permanent establishments shall be regarded as two different persons for the service tax purposes. In such a situation. the service provided and the service received is the same entity. Thus even if the service is provided by a person to its own self, the service tax will be applicable.

It is, therefore, felt that Section 66A is not only extra-territorial but also illogical and irrational. This amendment certainly requires a review.

agar@bol.net.in