Service tax liability lies with non-resident providers pre-Section 66A; Rule 2(1)(d)(iv) cannot create statutory liability; Explanation Section 65(105) post-dates period

HC allowed the petition and held that prior to enactment of Section 66A a non-resident service provider, not the Indian recipient, was liable for service tax; Rule 2(1)(d)(iv) cannot create liability not authorized by statute. The court ruled that Explanation to Section 65(105) and Section 66A post-date the relevant period, and therefore restrained the Respondents from levying or recovering service tax from the members of the petitioner association for services received by their vessels outside India from non-resident providers for 1-3-2002 to 17-4-2006.

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Issues: (i) Whether service tax could be validly levied on recipients in India for services rendered to their vessels and ships outside India during the period 1-3-2002 to 17-4-2006; (ii) Whether Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 and Notification 36/2004-S.T. (31-12-2004) or other subordinate instruments lawfully authorised levy on recipients prior to insertion of Section 66A (w.e.f. 18-4-2006).

Issue (i): Whether service tax could be validly levied on recipients in India for services rendered to their vessels and ships outside India during the period 1-3-2002 to 17-4-2006.

Analysis: The scheme of the Finance Act, 1994 as enacted placed the charge and liability of service tax on the person responsible for collecting the tax, i.e., the provider of the service, under the relevant charging and collection provisions. Notifications extending the territorial ambit (e.g., Notification 1/2002-ST) made specified services provided in territorial waters/continental shelf/EEZ taxable but did not shift the statutory charge from provider to recipient. The explanation to Section 65(105) (w.e.f.16-6-2005) made services from non-residents to Indian recipients taxable in character but did not itself cast the statutory charge on recipients prior to enactment of Section 66A. Section 66A (w.e.f.18-4-2006) expressly treated the recipient as if he had provided the service, thereby creating the statutory basis to tax recipients. Prior to 18-4-2006 there was no charging provision authorising levy on recipients for services rendered outside India.

Conclusion: Service tax could not validly be levied on Indian recipients for services rendered to their vessels and ships outside India for the period 1-3-2002 to 17-4-2006.

Issue (ii): Whether Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 and Notification 36/2004-S.T. (31-12-2004) or other subordinate instruments lawfully authorised levy on recipients prior to insertion of Section 66A.

Analysis: Rule 2(1)(d)(iv) sought to treat the recipient as liable to pay service tax where the provider was non-resident and the service was received in India. Such a rule conflicts with the charging scheme in Chapter V which made the provider the person liable; subordinate legislation cannot be framed so as to negate or displace the statutory charge. Notification 36/2004-S.T. notified services by non-residents but, read in context with Section 68(2), cannot be construed as authorising levy on recipients for services rendered outside India prior to a statutory provision expressly deeming the recipient to be the provider. Earlier Supreme Court authority addressing similar rule-based shifts of liability supports invalidating such rule-based transfers of charge.

Conclusion: Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 and Notification 36/2004-S.T. do not provide lawful authority to levy service tax on recipients for services rendered outside India prior to enactment of Section 66A; the rule is invalid to that extent.

Final Conclusion: The statutory authority to treat an Indian recipient as liable for service tax for services rendered outside India arose only with Section 66A w.e.f. 18-4-2006; measures in rules or notifications preceding that date could not validly shift the statutory charging provision to recipients, and assessments or demands based on such instruments for the period 1-3-2002 to 17-4-2006 are without lawful authority.

Ratio Decidendi: A charging provision in a taxation statute that imposes liability on the service provider cannot be displaced by subordinate rules or notifications; only an express statutory amendment (such as Section 66A, Finance Act, 2006) can deem a recipient to be the provider and create liability on the recipient.

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