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 ... Charge of service tax on service provider under Chapter V - validity of Rule 2(1)(d)(iv) making recipient liable for service tax - scope of notifications extending Chapter V to maritime zones - notification under sub section (2) of Section 68 notifying services by non residents - effect of explanation to clause (105) of Section 65 declaring services from non residents taxable - Section 66A empowering taxation of services received in India from non residents - authority of law for taxation - Article 265Scope of notifications extending Chapter V to maritime zones - charge of service tax on service provider under Chapter V - Validity of Notification 1/2002-ST dated 1-3-2002 as a basis to levy service tax on Indian recipients for services rendered beyond territorial waters - HELD THAT: - The notification extended the provisions of Chapter V to services rendered in the Continental Shelf, Exclusive Economic Zone and territorial waters of India, thereby making such services taxable. However, the notification did not alter the statutory scheme that casts the charge of service tax on the person responsible for collecting the tax under Chapter V. Consequently the notification cannot be read as conferring authority to levy service tax on the recipients in India for services rendered outside India, and therefore cannot justify demands on the Petitioners' members for services rendered to their vessels outside India. [Paras 16]Notification 1/2002 ST does not authorise levy of service tax on the recipients in India for services rendered outside India and cannot justify the demands.Validity of Rule 2(1)(d)(iv) making recipient liable for service tax - rule cannot override charging section - Validity of Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 (w.e.f. 16 8 2002) which defines the person liable to pay service tax as the recipient where the provider is non resident - HELD THAT: - Rule 2(1)(d)(iv) attempts to make the recipient of a service in India liable to pay service tax where the service provider is non resident. This is inconsistent with the statutory scheme in Chapter V which, as enacted prior to Section 66A, makes the person providing the taxable service the assessee and person responsible for collecting tax under Section 68. Rules framed under the rule making power cannot be so construed as to defeat or conflict with the charging and collection mechanism enacted by Parliament. Reliance on precedent where the Supreme Court struck down similar rule based shifting of liability reinforces that Rule 2(1)(d)(iv) is invalid to the extent it purports to cast liability on recipients for services rendered outside India. [Paras 17, 20]Rule 2(1)(d)(iv) is invalid insofar as it seeks to make the recipient liable for service tax for services rendered outside India, as it conflicts with the charging provisions of Chapter V.Notification under sub section (2) of Section 68 notifying services by non residents - charge of service tax on service provider under Chapter V - Validity and effect of Notification 36/2004 ST dated 31 12 2004 (w.e.f. 1 1 2005) notifying 'any taxable service provided by a person who is a non resident' for the purpose of making a person liable - HELD THAT: - Section 68(2) permits the Central Government to notify services in relation to which tax shall be paid by such person as may be prescribed. The notification of services provided by non residents makes such services taxable, but does not, read alone, convert services rendered outside India into services taxable on Indian recipients. If Rule 2(1)(d)(iv) is treated as framed pursuant to this notification, it would still impermissibly shift the charge of tax from provider to recipient in contradiction of the statutory scheme. Therefore Notification 36/2004 ST cannot be relied upon to justify levy of service tax on the Petitioners' members for services rendered to their vessels outside India. [Paras 18]Notification 36/2004 ST does not furnish lawful authority to levy service tax on Indian recipients for services rendered outside India.Effect of explanation to clause (105) of Section 65 declaring services from non residents taxable - charge of service tax on service provider under Chapter V - Effect of the Explanation added to clause (105) of Section 65 (w.e.f. 16 6 2005) which deems services provided by non residents to Indian recipients to be 'taxable service' - HELD THAT: - The Explanation declares that services provided by persons established outside India and received by persons in India shall be deemed taxable services. However, the Explanation does not alter who is the person chargeable with or responsible for collecting the tax under the Chapter as it existed prior to Section 66A. Consequently, while such services become 'taxable service' in definition, the charging and collection provisions still contemplate the provider as the person liable; the Explanation therefore does not empower the Respondents to levy service tax on Indian recipients for services rendered outside India. [Paras 19]The Explanation renders such services taxable in definition only and does not give authority to levy service tax on recipients in India for services performed outside India.Section 66A empowering taxation of services received in India from non residents - authority of law for taxation - Article 265 - Whether service tax could lawfully be levied on Indian recipients receiving services outside India prior to insertion of Section 66A (w.e.f. 18 4 2006) - HELD THAT: - Article 265 requires taxation to be by authority of law. Prior to insertion of Section 66A, the statutory scheme charged service tax on providers and the rules or notifications relied upon could not validly shift that charge onto recipients for services rendered outside India. The scheme was altered only by Section 66A inserted w.e.f. 18 4 2006, which explicitly treats such services as if the recipient had provided them in India and thus confers authority to tax recipients. Therefore, before 18 4 2006 there was no lawful authority to levy service tax on Indian recipients for services rendered outside India. [Paras 20, 21]There was no authority of law to levy service tax on recipients in India for services rendered outside India prior to the enactment of Section 66A; only after 18 4 2006 did such authority exist.Final Conclusion: The petition is allowed: respondents are restrained from levying or recovering service tax from the members of the Indian National Shipowners Association for services received by their vessels and ships outside India for the period 1 3 2002 to 17 4 2006, since there was no lawful authority prior to insertion of Section 66A to tax such recipients. 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.