A recent decision of the Mumbai High Court in Indian National Shipowners Association Vs. Union of India (2008-TIOL-633) appears to have authoritatively resolved a long standing matter of dispute regarding the charge of service tax on import of services into India. The Mumbai High Court has held that taxation of imports of services was legally permissible only after the introduction of Section 66 A of the Finance Act 1994 (the Act) with effect from April 18, 2006, and not for any period prior to that date.
In this case, the issue was with regard to levy of service tax on services rendered and or performed outside India by non-resident service providers in relation to the vessels and ships operated by the members of the appellant. The services ranged from Customs house agent services, clearing and forwarding agent services, cargo handling services and other similar performance-based services to general insurance services, manpower recruitment services and other services which were not performance-based.
The authorities had required the appellants (more correctly its members) to pay the service tax on such services, as recipients, on and from August, 16, 2002, being the date of introduction of Rule 2(1)(d)(iv) of the Service Tax Rules 1994. There was also an independent challenge to the taxability of such imports with effect from June, 16, 2005, being the date of coming into force of the Explanation to Section 65(105) of the Act.
The appellants argued that Rule 2(1)(d)(iv) was invalid in law since it was contrary to the overall scheme of service taxation as contained in the various Sections to the Act. The Mumbai High Court accepted this argument and held that not only was the Rule contrary to the provisions of the Act but also that it only required the recipients of services provided in India by non-residents not having a place of business in the country to declare and pay tax on such services, as a reverse charge. The Court consequently held that the Rule under reference could not at all be pressed into service in order to require service taxes to be paid on services received by the vessels and ships owned by the members of the appellants outside India.
The appellants thereafter successfully argued, that since the said Rule was both invalid in law and was inapplicable to services received outside India, the Explanation inserted to Section 65 (105), with regard to various taxable services, could also not have any effect on such services. The appellants argued that the above Explanation only stated that the services provided by a person who was a non-resident to a person who was an Indian resident shall be deemed to be a taxable service. The Court held that this Explanation did not specify that the tax on such deemed taxable services would need to be discharged by the recipients of such services. The Court also held that this Explanation did not enable the authorities to levy a tax in relation to services rendered outside India and hence nothing turned on the Explanation at all.
The High Court relied on the decision of the Supreme Court in the Laghu Udyog Bharti case (1999 (112) ELT-365) in arriving at its decision in regard to Rule 2(1)(d)(iv) (supra) and consequently on the point that imports of services were also not taxable in the hands of the recipients as per the Explanation to Section 65 (105).
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The appellants had also independently challenged the constitutional validity of Section 66 A of the Act, which was introduced with effect from April, 18, 2006, as well. However, during the hearing, this challenge was not pursued. The High Court, in any event, took note of the observations of the Supreme Court in the Laghu Udyog Bharti case (supra) and consequently held that it was only with the introduction of this Section in the statute that a person who was resident in India or who had a business in India became liable for payment of service taxes in relation to services received from a person who was a non-resident or who was from outside India.
The Court concluded that prior to the insertion of this enabling Section, the actions of the central government, whether in terms of inserting Rule 2(1)(d)(iv) or the Explanation to Section 65 (105) of the Act, were infructuous and did not provide the legal basis for taxation of import of services in India.
Now, this decision of the Mumbai High Court does not take note of the decision of the Tribunal in Foster Wheeler Energy Ltd Vs CCEX (2007 (7) STR 443), which was on similar lines. The important point however is that Foster Wheeler did not expressly deal with the legal position in regard to Explanation to Section 65 (105) whereas the Mumbai High Court has specifically done so. However, in another case of Hindustan Zinc Ltd Vs CCE (2008 VIL-18), the Tribunal did take note of the Explanation to Section 65 (105) as well as Section 66 A and stated inter-alia that the Explanation was a temporary measure to tax imports of services.
The High Court has, however, held in the case under reference that this Explanation did not permit the authorities to levy a tax in relation to services received outside India by a person resident in India. A harmonious reading of the two decisions would mean that services received outside India, by Indian residents, could not be deemed to be imports of services. If that be the case, the residual question which continues to remain even after the decision of the Mumbai High Court is whether Section 66 A can also be interpreted to tax services performed by non-residents and received outside India by Indian residents.
A careful reading of the Section suggests that such services may not be taxable and that only those services which are provided from outside India by a non-resident and received by a person in India will be treated as imports of services and hence charged to the tax. Indeed, an earlier decision of the Delhi High Court in Orient Crafts Ltd. Vs. Union of India (2006-TIOL-271) suggests exactly this. It is therefore likely that another decision of a High Court would be required in order to harmonise the two decisions in Indian National Shipowners and Orient Crafts Ltd.
However, the important point is that the Mumbai High Court has now authoritatively settled the issue of taxation of import of services in India and held them to be chargeable to the service tax from April, 18, 2006, and not before. It is hoped that this decision is accepted by the department and not contested further.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers