Export of services is zero rated under Indian service tax laws, in keeping with the tenet that taxes of a given country are never exported. The parameter for determining if a given service has been exported was governed by the erstwhile Export of Services Rules, 2005. The rules, in spirit, have also been adopted in the negative list regime of service tax, which is currently applicable.
When it comes to “tangible” services (such as services related to immovable property, namely, construction/lease of a premise, or performance based services, namely, survey and exploration) the criteria laid down is either the location of the immovable property or the place of performance of the service. However, for services, which are not anchored to either performance or to an immovable premise, the parameter laid down is their consumption, which is typically defined as the place where the recipient is located.
The problem arises when “consumption” or “use” is understood by the courts as being built into the term “recipient”. This leads to an investigation into who the “real” recipient of the services is. Would the “recipient” be the ultimate beneficiary, or would he be the one with whom the service provider executes a contract for services.
Till recently, the ultimate beneficiary was taken to be the “recipient” by the Delhi Service tax department on account of the decision in the Microsoft case.
In this case, Microsoft India was a service provider offering market support services to an offshore Microsoft entity. Microsoft India would undertake promotion of business in India, due to which, Microsoft offshore would sell software to Indian customers. Customers located in India were therefore, buying the software directly from Microsoft offshore.
Via Delhi CESTAT’s (“Tribunal”) stay order in the Microsoft case, the above market development activities rendered by Microsoft India for Microsoft Singapore in India were prima facie not adjudged as exports. The Delhi High Court rejected the challenge to the stay application filed against the pre-deposit that was ordered by the Tribunal. The High Court, while refraining from giving its final view, observed that since the final consumers were based in India, both destination and consumption of service was in India. The impact was felt by all multi-national corporations in the Delhi jurisdiction, since all marketing support services rendered in India to counterparts outside India became taxable owing to this interpretation.
However, the interpretation appears to have changed in the Paul Merchants Ltd. case (PML Case), resulting in a possible benefit to these businesses.
The Tribunal in the PML Case, while adjudging market support services as exports, observed that the location of the person making the payment for the service rendered would be relevant to determine whether there has been a export of services or not.
In the PML case, the Tribunal was faced with the question whether the fund transfer services that were rendered by the Taxpayers to Western Union located outside India could be export of services. Answering in affirmative, in the majority decision, the Tribunal observed that it is the person who requested for the service and is liable to make payment for the same who has to be treated as the recipient of the service and not the person or persons affected by the performance of the service. The Tribunal further observed that the destination has to be decided on the basis of the place of consumption and not at the place of performance of service.
It is interesting to note that during the course of arguments, Revenue unsuccessfully challenged the constitutionality of the rules on the basis that the definition of “export” under the rules was at variance with the definition of export under the Constitution of India and various Apex court decisions.
The Tribunal rejected the challenge to the legality of the rules, holding that the criteria adopted for determining whether goods were exported could not be used to determine export of services. The Tribunal in the decision departs from the “theory of equivalence” of goods and services for the purpose of levy of service tax. This has certain interesting effects in the annals of taxation, which are outside the purview of the current article. Suffice it to say, that this interpretation by the court in itself is novel as well.
The PML case offers much awaited relief for the industries. Taxpayers may revisit payments made in the past on account of show-cause notices issued. However, it is relevant to consider that service tax law provides a limitation of one year within which refund claims for tax paid has to be filed. However, if one considers that the amounts deposited with Revenue post issuance of show-cause notices were collected without of authority law, the amounts should not qualify as ‘tax’, of course unjust enrichment would have to be taken into consideration.
The decision, though, is in relation to support services rendered in relation to money transfers; however it perhaps would apply to various industry verticals that follow a similar pattern as in the PML case. The ratio should continue to apply in the present regime as well. However, given that the period for filing appeal against the Tribunal decision has still not lapsed; the joy of service providers may be short-lived. It would also be interesting to watch the next steps of the Revenue given that legality of the rules was also challenged, and since this is a Tribunal judgment – appealable against in the High Court.
Abhishek Dutta is a Partner and Ankita Bhasin is an Associate at HSA Advocates, a Delhi-based law firm