TaxTMI 
TaxTMI 
2011 (12) TMI 201
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the respondents declaring that the petitioner is not liable to pay Service Tax on the commission/fee paid to the company located in USA, for promoting and marketing its services in USA. 4. Brief facts giving rise to this writ petition are, that the petitioner is a 100% export oriented unit working under STPI Scheme and holds Customs Bonded License No.13/CUS/STP/2000-2001 dated 11.9.2000, in bond manufacturing sanction order issued by the Deputy Commissioner, Central Excise Division-II, Noida dated 11.9.2000 for manufacture of software. The petitioner is engaged in the e-publishing services, such as data capturing, data conversion, typesetting, formatting, paging, indexing etc. and exports the same to its customers in USA. In other words, the petitioner is editing and setting the contents of the books, which are received from USA. 5. The petitioner is also registered with the Service Tax Authority in the category of, 'On-line information and database access and/or retrieval services' vide Service Tax registration No. AAACA6454HST001 dated 13.11.2006 with the Commissioner, Central Excise, Division-II, Noida. 6. The petitioner entered into an agreement dated 29.9.2006 wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Section 68, "any taxable service provided or to be provided from a country other than India and received in India, under Section 66A of the Finance Act, 1994". (e) Section 69 of the Act requires that every person liable to pay the service tax should get registered. (f) Section 70 of the Act requires that every person liable to pay the service tax shall file return." 8. Under the Service Tax Instructions issued through Circular F. No. B-11/3/98-TRU, dated 7.10.1998 a clarification has been issued in para 7.3 as follows:- "7.3. Service tax is payable on all taxable services rendered in India, whether to an Indian or foreign client. However, services rendered abroad shall not attract service tax levy as service tax extends only to services provided within India." 9. The Service Tax Rules, 1994, which came into force from 16.6.2005, were amended in the year 2002 w.e.f. 16.8.2002 by introducing Sub-clause (iv) in clause (d) of sub-rule (1) of Rule 2 vide Notification dated 1.8.2002, providing that a person, who is a non-resident or is from outside India, does not have any office in India, the person receiving the taxable service in India was made liable to pay....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be taxable service for the purposes of this clause;" 12. The Ministry of Finance, Government of India issued a Notification No. 25/2005-ST dated 7.6.2005 and granted exemptions for any taxable service provided to an individual by a service provider, where the said taxable services are received and consumed outside India, not in the furtherance of commerce or for any business purpose. 13. With a view to replace the Explanation under Section 65 (105) of the Finance Act, 1994 with a substantive provision of law by Finance Act, 2006 w.e.f. 18.4.2006, Section 66A was inserted, which reads as follows:- "66A. Charge of service tax on services received from outside India: (1) Where any service specified in clause (105) of section 65 is,- (a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and (b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Finance Act, 1994 (32 of 1994); (b) "input" shall have the meaning assigned to it in clause (k) of rule 2 of the CENVAT Credit Rules, 2004; (c) "input service" shall have the meaning assigned to it in clause (l) of rule 2 of the CENVAT Credit Rules, 2004; (d) "output service" shall have the meaning assigned to it in clause (p) of rule 2 of the CENVAT Credit Rules, 2004; (e) "India" includes the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof. (f) words and expressions used in these rules and not defined, but defined in the Act shall have the meanings respectively assigned to them in the Act. 3. Taxable services provided from outside India and received in India.- Subject to section 66A of the Act, the taxable services provided from outside India and received in India shall, in relation to taxable services- (i) specified in sub-clauses (d), (m), (p), (q), (v), (zzq), (zzza), (zzzb), (zzzc), (zzzh), (zzzr), (z....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e services provided from outside India and received in India shall make an application for registration and for this purpose, the provisions of section 69 of the Act and the rules made thereunder shall apply. 5. Taxable services not to be treated as output services.- The taxable services provided from outside India and received in India shall not be treated as output services for the purpose of availing credit of duty of excise paid on any input or service tax paid on any input services under CENVAT Credit Rules, 2004." 15. The 'Business Auxiliary Services' is the new service introduced by amendment of the Finance Act, 2003 w.e.f. 1.7.2003. It covers any service in relation to promotion or marketing or sale of goods including the services provided as a commission agent. 16. The petitioner received a letter dated 18.9.2009 from the office of Commissioner, Central Excise Division-II, Noida with a audit programme for conducting the audit of the records of the petitioner from October 2009. The audit was conducted between 10.10.2009 to 13.10.2009 for the years 2006-07, 2007-08 and 2008-09. 17. The Superintendent, Central Excise, Range-14, Division-II, Noida issued a lette....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive Trade Practice in India. The MRTP Commission, in such a case, may not be able to stop import but there can be an order imposing post import restrictions such as, for example, not to sell imported goods in India in such a manner which will be regarded as a restrictive trade practice. The use of the words 'shall be deemed to be an agreement within the meaning of this section..." in Explanation-I to Section 35 and the time-frame for registration clearly indicates that Section 33 and Section 35 apply only to Indian agreements or agreements in India. The Explanation-I was incorporated to enlarge the ambit and give extra territorial jurisdiction in relation to those agreements which relate to performance of services in India, and any party to that agreement carries on business in India. The Supreme Court set aside the order passed by MRTP Commission against the Indonesian exporters. 21. Shri Mittal submits that Section 66A and the Rules of 2006 create another taxable event/incidence of tax from services provided to services received in India, which is against the legislative scheme. It is an artificial event sought to be taxed as many taxable services can never be received in Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eign national in the foreign country is taxed in the hands of citizen of India, it will lead to hardships as the service will be taxed in the country where it was rendered, as well as in India. It will lead to multiple tax of more than one country on the same activity. Shri Mittal has placed reliance upon All India Federation of Tax Practitioners v. Union of India 2007 (7) S.R.T. 625 (S.C.) in which it was held as follows:- "5. In late seventies, Government of India initiated an exercise to explore alternative revenue sources due to resource constraints. The primary sources of revenue are direct and indirect taxes. Central excise duty is a tax on the goods produced in India whereas customs duty is the tax on imports. The word "goods" has to be understood in contradistinction to the word "services". Customs and excise duty constitute two major sources of indirect taxes in India. Both are consumption specific in the sense that they do not constitute a charge on the business but on the client. However, by 1994, Government of India found revenue receipts from customs and excise on the decline due to W.T.O. commitments and due to rationalization of duties on commodities. Therefore, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he petitioner availed services of one M/s Software Services LC (SSLC), to procure orders and to promote business as per a Master Service Agreement dated 29.9.2006 paying them service charges liable to the Service Tax under the category "Business Auxiliary Service" as service recipient under Section 66A of the Finance Act, 1994. The petitioner as recipient of service in India by a foreign company was liable to pay the Service Tax. A request was made to him by the Superintendent of Central Excise by letter dated 18.6.2010 for compliance of objections. This letter was not a notice under Section 73 of the Act, which is yet to be issued. In the proceedings under Section 73 of the Act the petitioner shall be confronted with all evidences and full opportunity will be given to rebut all the allegation of the notice and to submit such evidence as the petitioner may deem fit. The agreement and transactions shall be fully examined and investigated by the adjudicating authority. 28. Shri Kesarwani submits that prima facie the agreement dated 29.9.2006 reveals the facts evidencing that the petitioner is recipient of taxable service (Business Auxiliary Service) and thus the petitioner is liab....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the department by way of audit report of audit team, the petitioner received taxable service provided by the foreign company (SSLC) in India, and thus being a deemed service provider the company is liable to pay service tax. 31. Shri Kesarwani submits that Section 66A is a valid provision. It does not suffer from the vice of unconstitutionality. The Act is referable to Entry 92-C and 97, of List-I of the Seventh Schedule, and Article 246 (1) and 248 of the Constitution of India. He has relied upon Tamil Nadu Kalyan Mandapam Association v. Union of India and others JT 2004 (4) SC 568 in which the constitutional validity of Section 65 clause 41 sub clause (p) of the Finance Act, 1994, defining the taxable service was upheld and the judgment of the Supreme Court in All India Federation of Tax Practitioners & others v. Union of India and others JT 2007 (10) SC 305 in which the legislative competence of the Parliament to levy Service Tax by way of Finance Act, 1994 and 1998 under Entry 97 of List-I on chartered accountants, cost accountants and architects was upheld. In Association of Leasing & Financial Service Companies v. Union of India and others JT 2010 (12) SC 49. The Supreme ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrine or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislature judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Dond 354 US 457 where Frankfurter, J. said in his inimitable style: In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial difference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstru....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ture in dealing with complex economic issues." 33. In this case the petitioners have basically challenged the validity of Section 66A of the Act on its extra territorial operation. It is alleged that the amendment seeks to levy service tax on the taxable event outside India. It is submitted by the petitioner that any act of receiving or rendering of service outside the territory of India is not amenable to the Finance Act, 1994, with reliance placed on Haridas Exports (supra). The impugned provisions/rules, it is submitted, create another taxable event namely from services provided to services received in India, which is against the scheme of legislation. It has been challenged as artificial, as taxable services can never be received in India. Since no service tax can be levied on the services provided outside India by a foreign company irrespective of the fact that the petitioner has taken the subject services, the extra territorial operation of the act requires to be struck down. It is submitted that the Ministry of Finance, Government of India by its letter dated June 27, 2008 had stated while referring the Board's letter dated 19.4.2006 clarifying admissibility of CENVAT cre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it was beyond the period of limitation. The Tribunal upheld the order on the premise that Section 66A of the Finance Act, 2006 was enforced with effect from 18.4.2006, which covered the services rendered outside India for imposition of service tax. The Punjab & Haryana High Court found that the Bombay High Court in Indian National Shipowners Association v. Union of India 2009 (13) S.T.R. 235 (Bom) following the judgment of the Supreme Court in Laghu Udyog Bharati v. Union of India 2006 (2) S.T.R. 276 (SC) upheld the imposition, after the revenue acquired legal authority to levy Service Tax by amendment of the Act on 18.4.2006. Accordingly such a person becomes liable to payment of Service Tax when he received service outside India from a person who is non-resident or is from outside India after 18.4.2006. The Delhi High Court in Unitech Ltd v. Commissioner of Service Tax, Delhi 2009 (15) S.T.R. 385 (Del) followed the judgment of Bombay High Court. 36. The constitutional validity on the competence of the Parliament to levy Service Tax has been upheld by the Supreme Court in Mandampam Association (supra) decided in the year 2004; All India Federation of Tax Practitioners (supra) d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eight and Measures (Enforcement) Act, 1959 insisted on verifying and stamping the said weights on demand of fees. These weights were manufactured in Bihar but were meant for sale and delivery in other States. The Supreme Court held that the verification and stamping is on the weights manufactured in the State; it is irrelevant, where the weights are sold, in the State or outside the State. The provisions of stamping have been enacted to protect the interests of the buyers and consumers. It is not unlikely that part of weights may travel to the internal market in the State or after their sale and delivery in other States. In the interests of consumers and keeping in view the object of the legislation, the weights should be verified and stamped at the very inception at the place, where they are manufactured. The provisions of the State Legislature in verifying and stamping the weights cannot, therefore, be said to be beyond its territorial legislative competence. 39. In GVK Industries Limited & Anr. v. Income Tax Officer & Anr., [2011] 4 SCC 36 the Supreme Court was not directly concerned with the issue, however, at the instance of the Attorney General, it considered the question ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like -, that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians. 125. It is important for us to state and hold here that the powers of legislation of the Parliament with regard to all aspects or causes that are within the purview of its competence, including with respect to extra-territorial aspects or causes as delineated above, and as specified by the Constitution, or implied by its essential role in the constitutional scheme, ough....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with India. 41. The charge of the Service Tax to be levied under Section 66A with the enactment of the Finance Act, 2006, is on the services received from outside India. It is not denied that the petitioner company has a fixed business establishment in India. The services by the foreign company, however, it is stated, are not received by the petitioner in India, and is in fact being rendered outside India for promotion of its business. The petitioner is specialised in providing customized solutions to publishing industry which includes publishing related services, composition, art and media services. The SSLC is a Corporation having its presence in Florida, USA and is promoting such services in USA under which SSLC provides front end support to USA based clients. Both the companies have a shared working relationship, under which SSLC has to promote publishing related services in USA to be executed by the petitioner-company in India. By the 'Master Services Agreement', dated 29.9.2006 the company decided to realign the business responsibilities and redefine roles and reach of the agreement. The offshore facility, in the definition clause of the agreement, means and includes such ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....permanent establishment must be involved in activity giving rise to profits. The Court while interpreting Section 9 (1) (vii) of the Income Tax Act held that it is necessary that the services not only be utilised within India, but also rendered in India or have such a live link with India that the entire income from fees as envisaged in Article 12 of the Double Taxation Avoidance Agreement (Between India and Japan) becomes taxable in India. In the facts of the case the Court held that there was nothing to show that the income derived by a non-recipient company irrespective of were rendered was utilised in India and since the entire services were rendered outside India have nothing to do with the permanent establishment, could not be held to be attributable to the permanent establishment and therefore not taxable in India. The case was decided on its own facts interpreting the Double Taxation Avoidance Agreement, and the contracts between the parties. 43. At this stage without there being any adjudication, it is difficult to accept that the SSLC is providing any offshore facility to the petitioner to carry out the business operations under the realigning agreement. The scope of t....