2017 (9) TMI 98 - HC - Service Tax

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 - Excessive delegation of legislative power - Rule-making power under Section 94(2)(f) of the Finance Act - Essential legislative function cannot be delegated - Place of provision of services (rule-making under Section 66C) - Taxable territory - Export of services - Intermediary servicesUltra vires - Excessive delegation of legislative power - Rule-making power under Section 94(2)(f) of the Finance Act - Essential legislative function cannot be delegated - Validity of Rule 6A(1) read with Rule 6A(2) of the Service Tax Rules insofar as it treats export of tour operator services (including services provided outside the taxable territory) as within the ambit of service tax. - HELD THAT: - The Court held that Rule 6A(1) and (2) purport to determine export of services even where those services are provided outside the taxable territory and thus seek to bring non-taxable services within the net of service tax. Section 94(2)(f) empowers rule-making only for determining export of 'taxable services' and does not permit the executive to make taxable what the statute does not tax. Subjecting non-taxable services to service tax is an essential legislative function which Parliament alone must undertake; it cannot be delegated to the central government by rules. Rule 6A thus exceeds the rule-making power conferred by the Finance Act and is ultra vires for attempting to determine taxability by subordinate legislation. The Court therefore struck down Rule 6A to the extent it treats exports of non-taxable services as amenable to service tax. [Paras 44, 45, 46, 53, 55]Rule 6A(1) read with Rule 6A(2) of the Service Tax Rules, insofar as they describe export of tour operator services to include non-taxable services and thereby seek to make them amenable to service tax, are ultra vires the Finance Act and invalid.Place of provision of services (rule-making under Section 66C) - Taxable territory - Export of services - Extent of rule-making power under Sections 94(2)(f)/(hhh) and Section 66C - whether these provisions empower the central government to decide taxability of services provided outside the taxable territory or only to determine place/characterisation of (taxable) services. - HELD THAT: - The Court concluded that Sections 94(2)(f) and 94(2)(hhh) permit rules to determine when an export of a taxable service takes place, the date for rate determination and related procedural matters, and Section 66C permits rules to determine the place of provision of taxable services. None of these provisions authorise the executive to convert services provided outside the 'taxable territory' into taxable services. Rules under Section 66C/PPSR 2012 must therefore operate only insofar as they relate to taxable services; they cannot constitutionally or legally determine that a non-taxable service rendered outside India is to be treated as taxable within India. [Paras 20, 21, 22, 46, 55]Sections 94(2)(f)/(hhh) and Section 66C empower rule-making to determine export/place of provision of taxable services only; they do not empower the central government to determine the taxability of services provided outside the taxable territory.Export of services - Taxability of composite services - Intermediary services - Whether services provided by Indian tour operators to foreign tourists (including composite package tours partly provided outside India) during the period in question are amenable to service tax. - HELD THAT: - Applying the statutory scheme and the invalidation of Rule 6A insofar as it sought to make non-taxable exports taxable, the Court found that services provided outside the taxable territory remain non-taxable. The characterisation of tour operator services as intermediary services under PPSR 2012 and the difficulty of apportioning value in composite services do not empower the executive to tax exports that are outside the taxable territory. Consequently, tour operator services provided to foreign tourists and paid for in convertible foreign exchange during the period are not amenable to service tax under the Finance Act. [Paras 25, 47, 51, 52, 56]Services rendered by Indian tour operators to foreign tourists, paid in convertible foreign exchange, during 1st July 2012 to 1st July 2017 are not amenable to service tax.Final Conclusion: Rule 6A(1) read with Rule 6A(2) of the Service Tax Rules is declared ultra vires insofar as it seeks to treat export of tour operator services (including services provided outside the taxable territory) as taxable; the relevant rule-making powers under Sections 94(2)(f)/(hhh) and Section 66C do not permit the executive to determine taxability of services provided outside the taxable territory; accordingly, tour operator services provided to foreign tourists and paid for in convertible foreign exchange during 1st July 2012 to 1st July 2017 are not amenable to service tax. 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.