Court Invalidates Rule Taxing Tour Operator Services as Exports

The Court declared that Rule 6A of the ST Rules, insofar as it includes non-taxable services in the definition of export of tour operator services, is ultra vires the FA and invalid. The central government is not empowered to decide the taxability of tour operator services provided outside the taxable territory. Services provided by Indian tour operators to foreign tourists from July 2012 to July 2017, paid for in foreign exchange, are not subject to service tax. Refunds, if applicable, will be processed under existing laws. The writ petition was disposed of without costs.

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Issues Involved:
1. Validity of Rule 6A of the Service Tax Rules, 1994 concerning 'Export of services'.
2. Validity of Section 94(2)(f) of the Finance Act, 1994.

Detailed Analysis:

Introduction and Background:
The writ petition by the Indian Association of Tour Operators seeks a declaration that Rule 6A of the Service Tax Rules, 1994 (ST Rules), concerning 'Export of services' is ultra vires the Finance Act 1994 (FA). The validity of Section 94(2)(f) of the FA is also challenged on the ground that it gives unguided and uncontrolled power to the central government to frame rules regarding 'provisions for determining export of taxable services'.

Position Prior to 1st July 2012:
Service tax was introduced by the FA with effect from 1st July 1994. Section 65(105)(n) of the FA defined 'taxable service' to mean any service provided by a tour operator in relation to a tour. Section 66 provided for the 'charge of service tax' at the rate of 12% of the value of the taxable service. Section 94(2)(f) empowered the central government to make rules 'for determining export of taxable services'. On this basis, the central government issued the Export of Services Rules 2005 (ESR 2005), which stated that export of taxable services shall be the provision of such services as are performed outside India. The resultant position was that even if a part of the service was performed outside India and the remaining in India, it would still be treated as having been performed outside India and thereby be construed as an export of service, exempt from service tax.

Position After 1st July 2012:
Significant changes were introduced in Chapter V of the FA with effect from 1st July 2012 by the Finance Act, 2012. Section 65 was omitted and substituted by Section 65B titled 'Interpretations'. Section 66B provided that service tax at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another. The net result was that services rendered outside the taxable territory of India would not be a 'taxable service' for the purposes of the FA.

Rule 6A Analysis:
Rule 6A of the ST Rules, inserted with effect from 1st July 2012, states that the provision of any service provided or agreed to be provided shall be treated as export of service when certain conditions are met. This rule brings within its ambit export of even non-taxable services, whereas Section 94(2)(f) permits making rules only in respect of 'taxable service'. This created problems for Indian tour operators organizing tours for foreign clients, as services provided outside India could not be made amenable to service tax under the FA since they were not rendered in the 'taxable territory'.

Foreign Trade Policy:
The Foreign Trade Policy (FTP) for years 2009-14 regarding export and import of goods and services stated that all tradable services covered under the General Agreement on Trade in Services (GATS) are considered as service exports if consideration is received in free foreign exchange.

Submissions on Behalf of the Petitioner:
The petitioner's counsel argued that Rule 6A suffers from the vice of excessive delegation as it brings non-taxable services within the ambit of service tax. It was contended that Rule 6A is ultra vires the FA. The counsel also pointed out that Section 94(2)(f) of the FA enabled the central government to make rules only for determining export of taxable services and not for levying tax on non-taxable services.

Submissions on Behalf of the Respondents:
The respondents' counsel argued that Rule 6A of the ST Rules was validly made in terms of the power granted to the central government under Section 94(2)(f) of the FA. It was maintained that the rules permitted levy of service tax since the service to the foreign tourist was provided in India by the tour operator located in India.

Judgment:
The Court declared that Rule 6A (1) read with Section 6A (2) of the ST Rules, insofar as it seeks to describe export of tour operator services to include non-taxable services provided by tour operators, is ultra vires the FA and in particular Section 94(2)(f) of the FA and is, therefore, invalid. Section 94(2)(f) or (hhh) of the FA does not empower the central government to decide the taxability of the tour operator services provided outside the taxable territory. They only enable the central government to determine what constitutes export of service, the date for determination of the rate of service, or the place of provision of taxable service. Section 66C of the FA enables the central government only to make rules to determine the place of provision of taxable service but not non-taxable service.

Conclusion:
The services provided by Indian tour operators to foreign tourists during the period 1st July 2012 to 1st July 2017, which have been paid for in convertible foreign exchange, would not be amenable to service tax. If any service tax becomes refundable as a result of this judgment, the claim for refund will be processed and paid in terms of the extant provisions of the FA read with the Central Excise Act 1944 and the rules thereunder. The writ petition was disposed of with no order as to costs.

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