2008 (12) TMI 41 - HC - Service Tax

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 ... Constitutional validity of Section 66A of the Finance Act, 1994 - Seeking to levy and recover service tax from the persons resident in India - services rendered and/or performed outside India by non-resident service providers - Provisions of Rule 2(1)(d)(iv) can not create any tax liability which is not authorized by law - HELD THAT:- By explanation added below Section 65(105) by Finance Act, 2005, it is clear that services provided by a non-resident outside India to a person residing in India has been declared to be taxable service. Therefore, though the services provided to the members of the Petitioners-Association outside India becomes taxable service, the charge of the tax continues to be on the provider of service as per the scheme of the Act, and because of the explanation also the Respondents do not get authority of law to levy a service tax in relation to the services rendered to the vessels and ships of the members of the Petitioners-association outside India. Now, because of the enactment of Section 66A, a person who is resident in India or business in India becomes liable to be levied service tax when he receives service outside India from a person who is non-resident or is from outside India. Before enactment of Section 66A it is apparent that there was no authority vested by law in the Respondents to levy service tax on a person who is resident in India, but who receives services outside India. In that case till Section 66-A was enacted a person liable was the one who rendered the services. In other words, it is only after enactment of Section 66-A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider. Before enactment of Section 66-A, there was no such provision in the Act and therefore, the Respondents had no authority to levy service tax on the members of the Petitioners-association. In the result, therefore, the petition succeeds and is allowed. Respondents are restrained from levying service tax from the members of the Petitioners-association for the period from 1-3-2002 till 17-4-2006, in relation to the services received by the vessels and ships of the members of the Petitioners-association outside India, from persons who are non-residents of India and are from outside India. ISSUES PRESENTED AND CONSIDERED 1. Whether, for the period 1-3-2002 to 17-4-2006, there existed lawful authority to levy and recover service tax from Indian recipients in respect of services rendered and/or performed outside India by non-resident service providers. 2. Whether Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 (as inserted w.e.f. 16-8-2002) validly cast liability to pay service tax on recipients in India where the service provider is non-resident and the service is performed outside India. 3. Whether Notification 1/2002-ST dated 1-3-2002 (extending Chapter V to Continental Shelf and Exclusive Economic Zone) validly imposed service tax liability on Indian recipients for services rendered beyond territorial waters. 4. Whether Notification 36/2004-ST dated 31-12-2004 (notifying taxable services provided by non-residents) and Section 68(2) empowered levy of service tax on Indian recipients for services provided outside India from 1-1-2005. 5. Effect and legal consequence of the Explanation to clause (105) of Section 65 (w.e.f. 16-6-2005) on the locus of the charging provision-i.e., whether the Explanation transformed recipient into a person chargeable prior to insertion of Section 66A (w.e.f. 18-4-2006). 6. Whether the later insertion of Section 66A (w.e.f. 18-4-2006) has retrospective effect or otherwise validates prior levies on recipients for services rendered outside India. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of lawful authority (1-3-2002 to 17-4-2006) to levy service tax on Indian recipients for services performed abroad Legal framework: Article 265 requires taxation only by authority of law. Chapter V of the Finance Act, 1994 (as enacted and as amended prior to 18-4-2006) contains provisions relevant to service tax: definition of 'taxable service' (Section 65), charging/levy (original Section 66), collection/assessee provisions (Section 68 and its penal/administrative adjuncts), and power to make rules (Section 94). Interpretation and reasoning: The scheme of the Act prior to 18-4-2006 made the person providing the taxable service the person responsible for collecting and paying service tax; the statute contemplates the provider as the assessee. Any imposition of liability on a recipient not contemplated by the charging provisions lacks statutory authority unless expressly provided by the Act or valid subordinate legislation under express empowering provisions. Ratio vs. Obiter: Ratio-tax cannot be levied on recipients for services rendered outside India without express statutory authority; prior scheme made provider the assessee. Conclusion: There was no lawful authority during 1-3-2002 to 17-4-2006 that empowered levying service tax on Indian recipients for services provided outside India by non-resident providers, except to the extent expressly covered by valid notifications extending territorial ambit (see Issues 3-5). Issue 2 - Validity of Rule 2(1)(d)(iv) (w.e.f. 16-8-2002) making recipient liable Legal framework: Section 64 and Section 94 empower rule-making; Section 68(1) and the broader charging scheme indicate the provider as the person responsible for collection. Rules must operate consistently with the statute and cannot contradict charging sections. Interpretation and reasoning: Rule 2(1)(d)(iv] defines 'person liable to pay service tax' to include a recipient in India where the provider is a non-resident without office in India. This departs from the statutory scheme which makes the provider the assessee. A rule that shifts the charge from provider to recipient would conflict with the charging and collection architecture of Chapter V and thus exceed rule-making power. Precedent treatment: The Court applied the principle in the Supreme Court's decision (referred to) which held that rules cannot shift the tax incidence from the person chargeable under the Act to another by rule-making; that precedent invalidated a similar rule concerning clearing agents. Ratio vs. Obiter: Ratio-Rule 2(1)(d)(iv) is invalid to the extent it attempts to make a recipient liable for services rendered outside India, because it conflicts with the Act's scheme. Conclusion: Rule 2(1)(d)(iv) is clearly invalid insofar as it purports to levy service tax on Indian recipients for services rendered outside India by non-resident providers during the relevant period. Issue 3 - Effect of Notification 1/2002-ST (1-3-2002) extending Chapter V to Continental Shelf and EEZ Legal framework: Notifications extending territorial reach declare that services provided in specified maritime zones fall within Chapter V. Such extension brings services physically rendered in those zones within the ambit of taxable services. Interpretation and reasoning: Notification 1/2002-ST makes services provided in Continental Shelf and EEZ taxable under Chapter V, but does not by itself change who is the person chargeable under the Act. The notification alters territorial scope but does not convert recipients into persons chargeable where the service is physically performed in those maritime zones by non-residents. Ratio vs. Obiter: Ratio-extension of Chapter V to maritime zones does not, without more, empower the tax authorities to levy service tax from Indian recipients for services rendered outside India beyond the territorial waters unless the charging provision or a valid notification under Section 68(2) so prescribes. Conclusion: Notification 1/2002-ST cannot justify levy of service tax on Indian recipients for services rendered beyond territorial waters where the provider is non-resident and no valid provision makes the recipient the person liable. Issue 4 - Effect of Notification 36/2004-ST (31-12-2004) issued under Section 68(2) Legal framework: Section 68(2) enables the Central Government to notify certain taxable services in respect of which the service tax shall be paid by such person and in such manner as prescribed, and 'all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax.' Interpretation and reasoning: Notification 36/2004-ST notified 'any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India.' The notification operates to identify categories of taxable services; however, the practical effect depends on the prescription of the person who shall pay and rules made under the notification. The notification, as framed, picks out services provided by non-residents but does not, standing alone, lawfully make the Indian recipient liable where the service is performed outside India; if Rule 2(1)(d)(iv) is treated as a rule under Section 68(2), it remains impermissible to the extent it conflicts with the statute. Interpretation continued: Where the notification is applied to services rendered outside India, it cannot be used to justify levying tax on recipients unless the notification and subsidiary rules unambiguously and validly shift liability consistent with the empowering provision. The Court finds that the notification did not validly change the person chargeable for services rendered to vessels outside India. Ratio vs. Obiter: Ratio-Notification 36/2004-ST does not validate imposition of service tax on Indian recipients for services rendered outside India absent a valid rule-making exercise consistent with Section 68(2) and the Act's scheme. Conclusion: Notification 36/2004-ST cannot be relied upon to sustain levy of service tax from Indian recipients in respect of services rendered to ships outside India for the period from 1-1-2005 onwards. Issue 5 - Effect of Explanation to Section 65(105) (w.e.f. 16-6-2005) Legal framework: The Explanation declares that a service provided by a person established in a country other than India and received by a person in India shall be deemed to be a taxable service for the purposes of clause (105) of Section 65. Interpretation and reasoning: The Explanation renders such cross-border services 'taxable service' within the definition clause. However, the Explanation does not, by itself, alter the statutory scheme regarding who is the person chargeable; it merely expands the definition of taxable service. Thus, post-Explanation, while the services in question may be taxable services, the charge for tax and the identity of the person liable continue to be governed by the charging sections and Section 68. Without an express provision making recipient the person liable, the charge remains on the provider. Ratio vs. Obiter: Ratio-Explanation makes such services taxable but does not, without more, empower authorities to collect service tax from Indian recipients prior to insertion of Section 66A. Conclusion: The Explanation (w.e.f. 16-6-2005) does not furnish authority to levy service tax on Indian recipients for services performed outside India; it only makes the services taxable in definition but does not displace provider-as-assessee principle. Issue 6 - Legal effect of Section 66A (w.e.f. 18-4-2006) and retrospective validation Legal framework: Section 66A expressly treats certain cross-border services as taxable and provides that such taxable service shall be treated as if the recipient had himself provided the service in India, thus making the recipient liable. Interpretation and reasoning: Section 66A is a legislative change explicitly shifting liability to recipients for services received in India from non-residents; it is prospective from its commencement (w.e.f. 18-4-2006). It does not have retrospective effect to validate levies imposed prior to its enactment. Ratio vs. Obiter: Ratio-only after insertion of Section 66A did the statute authorise levy of service tax on recipients for services received from non-residents; prior levies lack statutory basis. Conclusion: Section 66A provides the statutory basis for levying service tax on recipients from 18-4-2006 onwards; it does not validate prior demands for the period under challenge. Remedial Conclusion and Relief Interpretation and reasoning: Applying Article 265 and the statutory scheme, and following precedent invalidating rules that impermissibly shift tax incidence, the Court concludes there was no authority to levy service tax on Indian recipients for services rendered to ships and vessels outside India during 1-3-2002 to 17-4-2006. Ratio vs. Obiter: Ratio-Respondents are restrained from levying service tax on recipients for services rendered outside India in the period 1-3-2002 to 17-4-2006 because the levy lacked authority of law. Final Conclusion: The levy and attempts to recover service tax from Indian recipients in respect of services rendered to vessels and ships outside India for the period 1-3-2002 to 17-4-2006 are without authority of law and are set aside; Section 66A (w.e.f. 18-4-2006) alone authorises levy on recipients prospectively.