INTERNATIONAL TAXATION LAW

PAPER ON SERVICE TAX ON SERVICES RENDERED OUTSIDE AND INSIDE INDIA

UNDER THE GUIDANCE OF PROF. S KRISHNASWAMY

- SHAISTA NEELU ID NO. 447 LL.M IInd YEAR VIth TRIMESTER

DATE OF SUBMISSION OF PAPER: 08/05/2012

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Table of Contents

Contents ................................................................................................................................................ 2 Acknowledgement ................................................................................................................................. 3 CHAPTER ONE Introduction............................................................................................................ 4 CHAPTER TWO Taxation of employees of foreign enterprises in India .................................. 5-8 2.1 2.2 Amendment by Finance Act, 1983 ............................................................................................ 8 Case law on the applicability of Section 9 (1) (ii) of Income Tax Act ................................... 8-9

2.3 2.4 2.5

Choice of technicians from countries with which DTAA exists ................................ 9-10 Employees visiting India for less than 90 days .......................................................... 10-11 Provision of Accommodation ............................................................................................. 11

CHAPTER THREE Service tax on taxable services rendered outside India ............ 12-13 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 Extra territorial operation ............................................................................................... 13-15 Classification of taxable services .................................................................................. 15-16 Relevant taxable services ............................................................................................... 17-18 Valuation of taxable services ............................................................................................... 18 Person liable ..................................................................................................................... 19-20 Recovery and penalties ................................................................................................... 20-22 Jurisdiction ............................................................................................................................. 22 Judicial response.............................................................................................................. 22-23 Conclusion .................................................................................................. 24

CHAPTER FOUR

BIBLIOGRAPHY ............................................................................................................................. 25

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ACKNOWLEDGEMENT

First and foremost, I am very much grateful to Prof. S Krishnaswamy, who has been my project guide, for considering me capable of pursuing this project. I am also grateful to him for giving me proper guidance time to time without which it would not have been possible for me to give shape to this project. I would also like to express my gratitude towards the Library staffs of the National Law School of India University for their kind assistance. And last, but not the least, I am thankful to my classmates cum friends from the bottom core of my heart, for their immense encouragement and help whenever so required

SHAISTA NEELU

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CHAPTER ONE INTRODUCTION

Quite often cases involving the determination of liability to income-tax of foreign citizens rendering technical as well as non-technical services under a foreign employer but working in India come up for consideration for purposes of assessments to income-tax in India. In view of the specific provisions of section 5 read with section 6 of the Income Tax Act, the liability to income-tax in India of any foreigner coming to India for rendering services would be confined to the income which is actually accruing or is deemed to accrue in India and/or the income which is received or is deemed to have been received in India by such person. This is because of the fact that the foreign citizen who comes into India for the first time would remain a not ordinarily resident in India for the first 9 years after his arrival in India. Section 6(1) and 6(6) specifically provide for the foreigner being treated as a not-ordinarily resident for the purpose. Under the income-tax law, the tax liability of a non-resident and that of a not-ordinarily resident are by and large the same except for the difference that in the case of a not ordinarily resident, any income accruing or arising outside India from a business controlled from or a profession set up in India by the person who is not ordinarily resident would also become chargeable to tax. It is to be noted that The liability to income-tax in India being dependent essentially on the residential status of the taxpayer and not on his citizenship, one should decide, at the first instance, the question whether the foreigner visiting India and rendering services here is a non-resident or not ordinarily resident within the meaning of section 6 of the Income Tax Act and only thereafter the quantum of income assessable to tax under the different heads will have to be ascertained. Normally, a foreign citizen who visits India and renders services in India would attract liability to tax on the income earned in India for the services rendered by him. Section 9 (i) of the Income Tax Act, 1961 specifically provides that in every case income which falls under the head 'salaries'

must be deemed to accrue or arise in India. Consequently, the remuneration for the services rendered by the foreigner in India would be assessable to tax in India notwithstanding the fact that such remuneration may also suffer tax in the foreign country from which the employee has come to India.

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CHAPTER TWO TAXATION OF EMPLOYEES OF FOREIGN ENTERPRISES IN INDIA

Employees of foreign enterprises come to India on a variety of occasions. Multinational companies transfer their executives from one country to another very often depending upon the need for posting such employees in appropriate places in different countries. Under the agreements for foreign collaboration which may be entered into by foreign enterprises with Indian enterprises in the corporate as well as non-corporate sector, whether public or private, foreign technical personnel are sent to India by the foreign enterprises for technically assisting the Indian enterprises and also for executing the foreign collaboration agreements at different stages. The Income Tax Act in India provides for the individual being regarded as not ordinarily resident in India for the first nine years after his arrival into India. With a view to ensure that a person who is not ordinarily resident in India does not become resident and ordinarily resident in India by virtue of his stay in India being prolonged beyond the completion of 9 years, the employee may be posted to some other country and after a period of two years of continuous stay outside India, he may be brought back to India to secure that his residential status for the purpose of Income Tax in India continues to remain that of a non-ordinarily resident for a period of subsequent 9 years.1 In Kathiawar Coal Distributing Co. v. CJT 2it has been held that the commission paid for rendering other services must be regarded as accruing at the place where the services are actually rendered. In the absence of the specific provisions of section 9(l)(ii) to deem the salaries payable to employees as accruing in India when the services are rendered in India, the question of determining the place of accrual of the salary for purposes of assessment to income-tax in India came up for consideration before courts. Similarly in the case of CJT v. Phra Phraison SalarakAIR3, it was held that in the case of a forest officer of the Government of Siam who was employed on a fixed remuneration and was posted to render services in India the income attributable to his remuneration was held to accrue in Siam where the contract of employment was entered into and the remuneration was payable and in fact paid to him. In other words, the remuneration for the services rendered by an employee

1 2

Rajaratnam S., Commentary on Double Taxation Avoidance Agreements, Part I, p 528 (1958) 34 ITR 182 (Bom) 3 1929 Rang 1 (1929) 3 ITC 237

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was not necessarily to be regarded as accruing in India for income-tax purposes merely because it was earned in India.4 The very fact that the income of an employee attributable to the salaries earned in India is regarded statutorily as accruing in India under Section 9(1) (ii) presupposes that such income would not, but for the statutory provision, be assessable as accruing in India. Further, it presupposes that the income, in fact, does not accrue in India and that is why special provision have been introduced in the statute to deem the income as having accrued or arisen in India. In the case of employees who are government servants, being Indian citizens, Section 9 (1) (iii) further provides that their entire income assessable under the heads salaries shall be deemed to accrue in India even though such income is not attributable to the services rendered in India. In the case of employees who are not government servants and even in the case of employees who are government servants but who are foreign citizens, the remuneration is not deemed to accrue in India, but in cases where the income of the employer is earned in India, it is necessarily regarded as accruing in India by virtue of the deeming provision under Section 9 (1) (ii) irrespective of the fact whether the employee is an Indian citizen and also where he is employed by the government or by any other enterprise. The nature of his employment, the quantum of the remuneration and even the conditions of employment are irrelevant for the purpose.5 For the purpose of understanding the concept of levy of tax for services rendered in India, the Gujarat High Court in the case of CIT vs. S.G. Pgnatale6 has examined the meaning of the expression earned in India for the purpose of considering whether the remuneration of a foreign serving in India could be deemed to accrue in India. It was observed that if the income has accrued to the assessee, it is certainly earned by him in the sense that he has contributed to its production or parenthood of the income can be traced to him.7 Further, in the context of the remuneration representing commission derived by managing agents and the remuneration of a director for services rendered, the Supreme Court in the case of Shoorji Vallabhdas & Company vs. CIT8, has observed that normally the commission payable to the managing agents accrues at the place where the business of managing agency is actually done, i.e., where the services of the managing agents are performed.9
4 5

Supra Note No.1, p 529 Supra Note No.1, p 530 6 (1980) 124 ITR 391 7 Supra Note No.1, p 531 8 (1960) 39 ITR 775 9 Supra Note No.1, p 532

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In every case of foreign collaboration agreement before determining the liability to income tax attracted by the non-resident in India, it is essential for the tax authorities to find out as a matter of fact whether or not services are rendered by the non-resident in India. Unless a finding in this regard is given, the mere fact that there is a collaboration agreement between the Indian company and the foreign company would not be adequate to justify the levy of any tax on the non-resident in respect of the amounts received by the foreign company from the Indian enterprise for supply of technical know-how and towards remuneration for services of foreign technicians. Further, in the case of E.D. Sasson & Co. vs. CIT10, the Supreme Court has pointed out that, it is not the work done or the services rendered to the person but the income received or the income which has accrued to the person within the chargeable accounting period that is the subject matter of taxation. It is to be further noted that Section 9 (1) (ii) statutorily deems the income as accruing in India wherever the services are rendered in India regardless the place of actual accrual of such income. Supreme Court in the case of CIT vs. Bhogilal Laherchand11 observed that the term deemed brings within the net of chargeability income not actually accruing but which is supposed notionally to have accrued.12 In CIT vs. S.G. Pgnatale13, the Gujarat High Court had to deal with the case of a not ordinarily resident foreign citizen serving in India under the employment of a French company which had entered into a foreign collaboration agreement with the Gujarat State Fertilizer Company Limited. According to the terms of the collaboration agreement, the salaries and other benefits which the employee was entitled to receive from his foreign employer if he had continued to render services to the foreign country were to be regarded as retention remuneration and the amount thereof was credited by the foreign company to the account of the employee in the foreign country. The employee was assigned services in India as part of the foreign collaboration agreement between the foreign company and Indian company and he was entitled to receive from the Indian company certain amounts styled as living allowances at the rate of a specified amount per day. The employee was also entitled to all the benefits to which other employees of the foreign enterprise were entitled in the foreign country. As regards the retention remuneration of the employee, the Court held that it did not represent salary earned in India within the meaning of Section 9 (1) (ii) and would

10 11

(1954) 26 ITR 27 (1954) 25 ITR 50 12 Supra Note No. 1, p 534 13 Supra Note No. 6

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not, therefore, be assessable to income tax as having been deemed to accrue in India. Also, the living allowance received by the employee from the Indian company was held not attracting liability to tax since the living allowance was given to the assessee as a reimbursement rather than as a personal advantage. Thus, the living allowance was held to be totally exempt from tax and the employee was treated as not being assessable to income tax in India in respect of the remuneration received by him both in France and in India for the services rendered in India.14 2.1 Amendment by Finance Act, 1983: The Finance Act, 1983 had amended with retrospective effect from 1st April, 1979 the provisions of Section 9 (1) (ii) of the Income Tax Act by inserting an Explanation thereto. The Explanation to section 9(1) (ii) introduced by Finance Act, 1983 refers to what constitutes income earned in India. This Explanation was introduced by Finance Act, 1983 with effect from 1-4-1979 to get over the judgment of the Gujarat High Court in CIT v. S.G. Pgnatale15 in which it was held that in order to attract section 9(1) (ii) of the Act, liability to pay must arise in India. By the said Explanation, the original intention under section 9(1) (ii) has been revived. It explains the expression income earned in India to mean payment for the services in India even if the contract is executed outside India or amount is payable outside India. However, from the said Explanation it is not possible to infer the corollary, viz., that in all cases where services are rendered outside India, the salary cannot be deemed to accrue in India, ipso facto.16 Technicians of foreign collaborations often visit India for short periods to render specific technical services by remaining under the control, supervision and directions of their foreign employers while rendering technical services. Thus, while rendering service in India in this manner, it cannot be said that they obtain a right to receive their remuneration for the services rendered to the Indian collaborator by the mere rendering of such services. Hence, it cannot be said that the salary income attributable to the services rendered accrues or arises in India. 2.2 Case Law on the Applicability of Section 9 (1) (ii): In the case of Capt. A.L. Kapoor vs. First ITO17, the ITAT held that the salary of a captain of a ship, registered in India though working outside the territorial waters of India, would be
14 15

Supra Note No. 1, p 536 Supra Note No. 6 16 http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2009ITAct/%5B2004%5D140Taxman0405(Utt aranchal).htm(02-05-2012) 17 (1989) 28 ITD 296 (Bom.)

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deemed to accrue in India and hence taxable under Section 9 (1) (ii) of the Income Tax Act. Similarly, the Allahabad Bench of ITAT in the case of ITO vs. G.E. Hawn18 held that the foreign technicians visiting India to render technical services would attract liability to income tax in India by virtue of their foreign income from salary being deemed to accrue or arise in India under the Explanation to Section 9 (1) (ii) with effect from 01/04/1979. Therefore, the foreign technicians were held to be taxable in India. Further, the living allowances were also held to be not in the nature of a special allowance or benefit specifically granted to meet wholly, necessarily and exclusively expenses incurred by the technicians in the performance of duties of office or employment and hence, benefit of exemption under Section 10 (14)19 would not be admissible.20 The Calcutta Bench of ITAT in the case of ITO vs. P.B. Buissommer21 held that the Explanation to Section 9 (1) (ii) of the Income Tax Act inserted by the Finance Act, 1983 with retrospective effect from 01/04/1977 is procedural in nature and would, therefore, apply to pending proceedings as well. It is also to be noted that if a foreign company obtains permission of the Reserve Bank of India to sell goods in India and deputes a foreigner to head the branch of the foreign company for which technical and marketing support is also provided to the distributors and customers with no manufacturing activities carried on in India, the person so deputed would not be entitled to claim the status of a technician, and hence, would not be exempt from income tax as observed in the case of In re (2000) 242 ITR 698 (AAR).22 2.3 Choice of technicians from countries with which DTAA exists: With a view to protecting the interests of the technicians of foreign collaborations and to keep as far as practicable away from the problem of huge burden of tax falling on the Indian enterprise in respect of the income of the technicians of the collaborator, it would be not only advisable but also essential to choose those technicians who are citizens of and residents in a
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(1987) 28 TTJ 594 Section 10 (14) of the Income Tax Act provides that: (i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit [as may be prescribed], to the extent to which such expenses are actually incurred for that purpose ; (ii) any such allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, or to compensate him for the increased cost of living, [as may be prescribed and to the extent as may be prescribed] [Provided that nothing in sub-clause (ii) shall apply to any allowance in the nature of personal allowance granted to the assessee to remunerate or compensate him for performing duties of a special nature relating to his office or employment unless such allowance is related to the place of his posting or residence] 20 Supra Note No. 1, p 545 21 (1985) 21 TTJ 556 22 Supra Note No. 1, p 546

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country with which India has entered into an agreement for avoidance of double taxation. This is most imperative if one has to keep himself away from the arbitrary provisions of Section 9 (1) (ii) of the Income Tax Act and the explanation thereto particularly because the exemption introduced in the Income Tax Act to counter the benefit of exclusion from total income in the case of foreign companies in respect of the tax paid by the Indian enterprise on their income by way of royalties and fees for technical services would not extend to the tax on the salaries of the collaborators technicians.23 2.4 Employees visiting India for less than 90 days: Along with the choice of technicians within the terms of the double taxation avoidance agreements, it would also be necessary for the Indian enterprise to seek and obtain the approval of the Central Government for exemption from income tax under Section 10 of the Income Tax Act to ensure that even when the income of the technician becomes taxable in India under the head salaries, such income qualifies for exemption from income tax. Under Section 10 (6) (vi)24 of the Income Tax Act, exemption is admissible without any limit, in respect of the remuneration received by a foreign national in his capacity as an employee (whether technician or not) of a foreign enterprise if such remuneration is attributable to the services rendered by him during his stay in India. However, this exemption is subject to three conditions: (i) The foreign enterprise should be one which is not engaged in any business activity in India (ii) The employees stay in India should not exceed 90 days in the aggregate during the previous year (iii) The remuneration for which exemption is sought by the technician should not be liable to be deducted from the income of the employer chargeable to income tax in India25 Moreover, for the purpose of claiming exemption from income tax in the case of foreign technicians under Section 10 of the Income Tax Act, it is essential that there should be

23

Supra Note No.1, p 547 Section 10 (6) (vi) of the Income Tax Act states: in the case of an individual who is not a citizen of India, the remuneration received by him as an employee of a foreign enterprise for services rendered by him during his stay in India, provided the following conditions are fulfilled (a) the foreign enterprise is not engaged in any trade or business in India ; (b) his stay in India does not exceed in the aggregate a period of ninety days in such previous year ; and (c) such remuneration is not liable to be deducted from the income of the employer chargeable under this Act 25 Supra Note No. 1, p 549
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employer-employee relationship between the Indian enterprise paying remuneration and the foreign technician receiving the same as otherwise the exemption would not be admissible.

2.5 Provision of Accommodation: Where an employee of a foreign company is deputed to supervise the work of erection in India of plant and machinery for which he is provided with rent free accommodation and the accommodation is provided wholly for the purpose of discharge of his official duty, then the provision of rent free accommodation cannot be regarded as a prerequisite in the hands of the technician and the same would be exempt from income tax under Section 10 (14) of the Income Tax Act. For instance in the case of CIT vs. D.S. Blackwood26the assessee, an engineer was a permanent employee of a company in Scotland and that company entered into an agreement with the West Bengal State Electricity Board for erection of gas turbines and for carrying out that work the assessee was deputed to India to supervise the erection. The assessing officer took the view that the rent free accommodation given by the foreign company was a prerequisite under Rule 3 of the Income Tax Rules and imposed income tax on the foreign engineer. On appeal, the levy of tax was cancelled and the departmental appeal to the Tribunal resulted in difference of opinion between the members of the Tribunal and ultimately the majority view was in favour of the assessee.27 Similarly in the case of ITO vs. M. Shimizu28the Ahmedabad Bench of ITAT held that the benefit by way of free boarding and lodging, travel and passage money and value of free conveyance for travel from the residence to the plant and for local travel within the city would be nothing but reimbursement of a necessary disbursement and, hence, would not constitute a prerequisite or benefit liable to tax under the Income Tax Act.

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(1989) 178 ITR 470 R. Santhanam, Commercials Handbook on Double Taxation Avoidance Agreements & Tax Planning for Collaborations, 8th Edition, 2011, Commercial Law Publishers (India) Pvt. Ltd., Delhi, Vol. I, p 1.840 28 (1995) 51 TTJ 562

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CHAPTER THREE SERVICE TAX ON TAXABLE SERVICES RENDERED OUTSIDE INDIA

The levy of service tax has become one of the important sources of revenue for the Central Government in the recent years and the various provisions enacted for the purpose have resulted in voluminous records to be maintained and co-relation thereof from the side of the service provider and the service recipient as well as the Revenue. The Constitution of India was amended by the Constitution (Eighty Eighth Amendment) Act29, 2003 to insert Entry 92C in the List I of the Seventh Schedule to the Constitution to empower the Union of India to levy taxes on services since prior to the Amendment in 2003. Article 268A has also been enacted by inserting the same in the Constitution to regulate service tax being levied by the Union and collected and appropriated by the Union and the States. Thus, the sharing of the revenue in respect of the service tax would be based on such principles being formulated by law to be enacted by the Parliament. In view of the exclusive powers conferred on the Union of India to levy and collect service tax on the taxable services, taxpayers whether resident or non-resident would not be entitled to plead that the Central Government has no jurisdiction or authority to levy the same. Notification No.10/2006 (ST) F.No. B1/4/2006-TRU dated 19-04-2006 is the Service Tax (Second Amendment) Rules, 2006 by which it is sought to be stipulated that in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India, under Section 66A of the Finance Act30, the recipient of such
29

Article 268A - After article 268 of the Constitution, the following article shall be inserted, namely: - Service tax levied by Union and collected and appropriated by the Union and the States. Article 268A.-(1) Taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of India and the States in the manner provided in clause (2). Amendment of Seventh Schedule. - In the Seventh Schedule to the Constitution, in List I-Union List, after entry 92B, the following entry shall be inserted, namely: - 92C. Taxes on services. 30 Section 66A. (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 India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply: Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply: Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

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service is deemed to be the person assessable and liable to pay service tax. Section 66 A was inserted to the Finance Act, 1994 by the Finance Act, 2006 to regulate the charge of service tax on services received from outside India. According to Section 66A, in cases where any service specified in Section 65 is provided or to be provided by a person who has established 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 business in a country other than India and such service is received by a person who has his place of business, fixed establishment, permanent address or usual place of business in India, such service shall be taxable service. But if there is no commercial activity involved, the recipient of service would not attract service tax liability thereon. It is to be noted that where the provider of service has his business establishment both in that country and elsewhere, the country where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from where the service is provided. Again, the explanation 1 to the Section 66A provides that a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.31 Hence, taxable services provided from outside India and received in India in relation to taxable services specified in Section 65 (105), be treated as taxable services rendered in India subject to Section 66A. As a result, services provided or to be provided in relation to an immovable property situated in India, although rendered from outside India, would be taxable in India if falling within the category of taxable services specified in the Section 65(105). 3.1 Extra-territorial Operation: The extra-territorial operation of the levy of service tax is an area of serious concern especially when there is no double taxation avoidance agreement between India and the respective foreign country in the matter of levy and collection of service tax and also for providing relief from double taxation in respect of the same service both in India and the

(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section. Explanation 1. A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country. Explanation 2.Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted 31 Supra Note No. 27, p 1.1127

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foreign country. The issue involved is that the recipient of service is sought to be deemed and regarded as having rendered the service to himself which is a concept totally alien to the basic concept of service being rendered by a person to someone else. The same person cannot render service to himself nor can he be a client of himself. There is no reason why the Indian Government should attempt to tax the non-resident rendering service outside India by presuming or deeming that such service rendered outside India must be regarded as having been rendered in India and that too by the person in India who is the recipient of that service.32 Every transaction in the course of business or commercial activities involving any taxable service specified under new rules, would attract service tax liability in India with serious and substantial burden of tax, interest and penalties as also action for prosecution for which neither the resident nor the non-resident would lawfully be liable. The Government cannot justify such arbitrary levies mechanically being imposed on services rendered outside India by non-residents. The service tax levy by the very nature is intended to be operative only within the territorial limits of India and that too, for services rendered actually in India. By deeming taxable services rendered outside India as if they had been rendered in India and that too, by the recipient of the service who is resident in India, the Government is doing the greatest harm to the international trade and commerce ignoring its own limitations and lack of jurisdiction to impose the levy of tax on services which are actually rendered outside India by the non-residents who themselves are not held liable to tax. Under the Income Tax Act, non-residents are held liable to tax in India only to the extent of income deemed to accrue or arise in India and income which is deemed to be received in India by them in addition to income which actually accrues or arises or is received in India. Therefore, a non-resident is not taxable in India on income accruing or arising outside. On the same analogy, non-residents rendering services outside India, cannot and should not be treated as taxable in India nor should they be treated as having rendered taxable services in India either by themselves or through the resident in India who is recipient of the taxable service and on whom the tax liability is sought to be shifted. By doing so, the Indian government has created a big trap for all non-residents to fall and with no relief from double

32

Supra Note No. 27, P 1.1129

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taxation in the absence of any double taxation avoidance agreement in regard to service tax being in existence.33 Although the problems of double taxation under the Income Tax Act are sought to be avoided by entering into double taxation avoidance agreements between India and respective foreign country but no such agreement or treaty is in contemplation in service tax matters. Moreover, it is settled law that the tax authorities in India have no extra-territorial jurisdiction and cannot impose levies of taxes on transactions which take place outside India. The Delhi High Court in Orient Crafts Ltd. vs. Union of India34 has dismissed the writ petition challenging the constitutional validity of Section 66A and left the matter to be examined and decided on merits by lower authorities. The imposition of tax on services rendered outside India by treating the service as having been rendered in India and that too, by the person receiving the services totally ignores the situs of the action or transaction involving the service being rendered outside India. The new provision, therefore, may have effect of deterring nonresidents to come forward to render services to their counter parts in India in the course of business and technical or other commercial activities and hence, the entire approach of the Government needs reconsideration and reversal to ensure that services rendered outside India are kept totally outside the purview of service tax in India.35 3.2 Classification of Taxable Services: Section 65 (105) (zzzza) of Finance Act, 1994 provides that Taxable Service means any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in railways, transport terminals, bridges, tunnels and dams. Explanation.for the purposes of this sub-clause, works contract means a contract wherein, (i) Transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and (ii) Such contract is for the purposes of carrying out,
33 34

respect of roads, airports,

Supra Note No. 27, p 1.1130 (2006) 4 STR 81-In the present case, the petitioner is an exporter and has availed the services of a commission agent situated in a foreign country for procuring business of export of goods from India to other foreign countries. It appears that according to the authorities the services of the commission agent are taxable in India, while according to the petitioner these services are not liable to service-tax. 35 Supra Note No. 27

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(a) Erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or airconditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or (b) Construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or (c) Construction of a new residential complex or a part thereof; or (d) Completion and finishing services, repair, alteration, renovation or similar services, in relation to (b) and (c); or (e) Turnkey projects including engineering, procurement and construction or (f) Commissioning (EPC) projects36 The classification of taxable services shall be determined according to the terms of the subclauses (105) of section 65. It provides that when for any reason , a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected as follows :(a) The sub-clause which provides the most specific description shall be preferred to sub clauses providing a more general description; (b) Composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable; (c) When a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merits consideration.37 restoration of, or

36 37

Supra Note No. 27 Supra Note No. 27

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3.3 Relevant Taxable Services: Of the many taxable services specified in the statute, the taxable service relating to consulting engineer services, commercial and industrial construction services, business auxiliary services, business support services, broadcasting services, cable operators services, convention services, courier services, credit rating agency services, erection, commissioning or installation services, fax services, event management services, franchise services, forward contract services, general insurance business services, insurance auxiliary services, intellectual property services, internet caf services, internet telephony services, leased circuit services, life insurance business services, mailing services, management consultancy services, maintenance and repair services, manpower recruitment or supply agency services, market research agency services, etc., construction of Complex services would be of relevance to the affected persons in India and abroad insofar as it relates to the taxable services being rendered in India or deemed to be so rendered and tax payable thereon. The service tax being of recent origin and the judicial analysis of the statutory provisions being limited, the impact of service tax in each case must be examined to determine whether service tax liability is attracted and if so, who is the assessee and how the amount of tax liability is to be discharged.38 The Supreme Court in the case of Star India Private Limited vs. CCE39 has held that the liability of a person to service tax would be attracted under Section 65 of the Finance Act, 1994 in respect of broadcasting services rendered by the broadcasting agency. In this case, the appellant is a company incorporated under the Companies Act, 1956, and carries on business in India. It is the agent of M/s. Satellite Television Asian Region Limited, Hong Kong (referred to as "Star", Hong Kong). The business of Star is to telecast channels from satellites situated outside India. Some of the channels are available and enjoyed by the customers in India. According to the appellant, it does not broadcasting, but merely sells time slots for advertisement and obtain sponsors for the serials, programmes or live events, etc. Thus, when the service of broadcasting was introduced in the Finance Act, 1994 as a taxable service with effect from 16-7-2001, by the Finance Act, 2001, the appellant disputed its liability to make any payment of service tax on the ground that it did not, in fact, broadcast. The Commissioner, however, held against the appellant. The appellant appealed before the Commissioner (Appeals). While the appeal was pending, the Finance Act, 2001, was
38 39

Supra Note No. 27, p 1.1137 (2006) 280 ITR 321

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amended by the Finance Act, 2002. The effect of the amendment, inter alia, was to make an agent, such as the appellant, liable to pay service tax as broadcaster. The liability was extended not by way of clarification but by way of amendment to the Finance Act with retrospective effect. It is well established that while it is permissible for the Legislature to retrospectively legislate, such, retrospectively is normally not permissible to create an offence retrospectively. The section expressly makes the assessee liable under the amended provision to pay the tax within the period of 30 days from the date of the Presidential Assent to the Finance Bill, 2002. It is admitted that the Finance Bill, 2002, was assented to on 11-5-2002, by the President. In the circumstances, the appellant was entitled to a period of thirty days thereafter to make payment of the tax. Needless to say, if it did not make payment within thirty days from 11-5-2002, it would be liable to pay interest at the rate specified after that date. Since the appellant was carrying on the activities of selling time slots for advertisements, obtaining sponsors for serials etc., on telecast channels, it was held to be liable to service. The levy of tax on consulting engineers, architects, chartered accountants, etc., has been held to be constitutionally valid in the case of Chartered Accountants Association vs. Union of India (2006) 2 STR 300 Guj.40 3.4 Valuation of taxable services: Valuation of taxable services for levy of service tax is governed by Section 67 of the Finance Act, 1994. Accordingly, where service tax is leviable on any taxable service with reference to its value, then such value shall: (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. Thus, in cases where the gross amount charged by the service provider is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable is equal to the gross amount charged so that the service tax payable is reduced from the gross amount of consideration to arrive at the value of taxable service.41

40 41

Supra Note No. 27, p 1.1137 Supra Note No. 27, p 1.1133

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3.5 Person liable: Service tax is required to be paid under Section 68 by every person providing taxable service to any person at the specified rate in the manner and within the period specified for the purpose. However, in respect of certain taxable services notified by the Central Government in the Official Gazette, the person paying the service tax would be different from the person rendering the service. The person who is made liable to pay service tax is deemed to be the assesse even though he has not rendered the taxable service. The persons liable to pay service tax are required to get registered under Section 6942 with the Central Excise Authorities having jurisdiction over them and failure to get registration would attract liability to penalty also. The registration number allotted is required to be indicated in every document for payment of tax and for correspondence with the authorities concerned relating to service tax.43 Section 70 of the Act requires return of service tax to be filed periodically to the Superintendent of Central Excise in the prescribed form. The Superintendent of Central Excise before whom return was filed was required up to 10-09-2004 under Section 7144 to make verification of the tax assessed by the assesse and to carry out necessary inquiries to
42

Section 69 of the Finance Act, 1994: Registration (1) Every person liable to pay the service tax under this chapter or the rules made there under shall, with in such time in such manner and in such form as may be prescribed, make an application for registration to the Superintendent of Central Excise. (2) The Central Government may, by notification in the Official Gazette, specify such other person or class of persons, who shall make an application for registration within such time and in such manner and in such form as may be prescribed. 43 Supra Note No. 27, p 1.1134 44 Section 71 of the Finance Act, 1994: Scheme for submission of Returns through Service Tax Preparers. (1) Without prejudice to the provisions of section 70, the Board may, by notification in the Official Gazette, frame a Scheme for the purposes of enabling any person or class of persons to prepare and furnish a return under section 70, and authorise a Service Tax Return Preparer to act as such under the Scheme. (2) A Service Tax Return Preparer shall assist the person or class of persons to prepare and furnish the return in such manner as may be specified in the Scheme framed under this section. (3) For the purposes of this section, (a) Service Tax Return Preparer means any individual, who has been authorised to act as a Service Tax Return Preparer under the Scheme framed under this section; (b) Person or class of persons means such person, as may be specified in the Scheme, who is required to furnish a return required to be filed under section 70. (4) The Scheme framed by the Board under this section may provide for the following, namely: (a) the manner in which and the period for which the Service Tax Return Preparer shall be authorised under subsection (1); (b) the educational and other qualifications to be possessed, and the training and other conditions required to be fulfilled, by a person to act as a Service Tax Return Preparer; (c) the code of conduct for the Service Tax Return Preparer; (d) the duties and obligations of the Service Tax Return Preparer; (e) the circumstances under which the authorisation given to a Service Tax Return Preparer may be withdrawn; (f) Any other matter which is required to be, or may be, specified by the Scheme for the purposes of this section.

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ascertain whether any service tax liability had escaped assessment or had been under assessed and refer the matter to the Assistant/Deputy Commissioner who would thereafter pass appropriate orders of assessment as may be deemed fit. In case of escapement of service tax, Section 73 of the Finance Act45, required show cause notice to be issued by the Assistant/Deputy Commissioner to bring to tax value of taxable services which had escaped assessment. If the officer concerned has reason to believe that by reason of omission or failure on the part of the assesse to file a return under Section 70 for any period or to disclose wholly and truly all material facts required for verification of the assessment, the value of the taxable services had escaped assessment or had been under assessed or service tax had been short-paid or any erroneous refund had been granted, the notice could be issued within five years to the person liable to pay the tax. If however, there is no omission or failure on the part of the assesse but still service tax had escaped assessment or had been under assessed, the officer concerned has reason to believe that such escapement has taken place and has information in his possession to justify the demand of service tax, the notice could be issued within one year to bring to tax the amount which had escaped earlier.46 3.6 Recovery and Penalties: The service tax collected is required to be deposited under Section 73A of the Finance Act, 199447 to the credit of the Central Government. Interest is chargeable under Section 73B 48 on service tax collected in excess of the tax assessed or determined and paid. Provisional
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Section 73 of the Finance Act, 1994: (1) Where any service tax has not been levied or paid or has been shortlevied or short-paid or erroneously refunded, the Central Excise Officer (OLD- Assistant Commissioner of Central Excise or, as the case may be, the Deputy Commissioner of Central Excise) may, within one year from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice 46 http://www.eximkey.com/contents/showpage1.asp?pageid=14350(24-04-2012) 47 Section 73A of the Finance Act, 1994 reads as: (1) Any person who is liable to pay service tax under the provisions of this Chapter or the rules made thereunder, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service under the provisions of this Chapter or the rules made thereunder from the recipient of taxable service in any manner as representing service tax, shall forthwith pay the amount so collected to the credit of the Central Government. (2) Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government. 48 Section 73B of the Finance Act, 1194: Where an amount has been collected in excess of the tax assessed or determined and paid for any taxable service under this Chapter or the rules made thereunder from the recipient of such service, the person who is liable to pay such amount as determined under sub-section (4) of section 73A, shall, in addition to the amount, be liable to pay interest at such rate not below ten per cent. And not exceeding twenty-four per cent. per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette, from the first day of the month succeeding the month in which the amount ought to have been paid under this Chapter, but for the provisions contained in sub-section (4) of section 73A, till the date of payment of such amount.

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attachment is permissible under Section 73C49 to protect the interest of the Revenue in certain cases. Interest on delayed payment of service tax is required to be paid under Section 75 50 at the prescribed rate for the period of delay. Penalty for failure to pay service tax is imposed under Section 76 of the Finance Act, 1994 which provides that any person, liable to pay service tax in accordance with the provisions of section 68 or the rules made under this Chapter, who fails to pay such tax, shall pay, in addition to such tax and the interest on that tax amount in accordance with the provisions of section 75, a penalty which shall not be less than two hundred rupees for every day during which such failure continues or at the rate of two per cent. Of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax?51 Provided that the total amount of the penalty payable in terms of this section shall not exceed the service tax payable. For instance, X, an assessee, fails to pay service tax of Rs. 10 lakhs payable by 5th March. X pays the amount on 15th March. The default has continued for 10 days. The penalty payable by X is computed as follows: 2% of the amount of default for 10 days = 2 x 10, 00, 000 x 10/31= Rs. 6,451.61 Penalty calculated @ Rs. 200 per day for 10 days =Rs. 2,000 Penalty liable to be paid is Rs. 6,452.00. Penalty for contravention in the matter of suppression of value of taxable service is levied under Section 78 of the Act of an amount which is not less than 100% and not more than 200% of the service tax not levied or paid or short-levied or short-paid or erroneously refunded. In other cases of contravention of any provision of the Act or rules, penalty of not
49

Section 73C of the Finance Act, 1994 reads as: (1) Where, during the pendency of any proceeding under section 73 or section 73A, the Central Excise Officer is of the opinion that for the purpose of protecting the interests of revenue, it is necessary so to do, he may, with the previous approval of the Commissioner of Central Excise, by order in writing, attach provisionally any property belonging to the person on whom notice is served under sub-section (1) of section 73 or sub-section (3) of section 73A, as the case may be, in such manner as may be prescribed. 50 Section 75 of the Finance Act, 1994: Interest on delayed payment of Service Tax Every person, liable to pay the tax in accordance with the provisions of section 68 or rules made thereunder, who fails to credit the tax or any part thereof to the account of the Central Government within the period prescribed, shall pay simple interest at such rate not below ten per cent. And not exceeding thirty-six per cent. per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette, (OLD- at the rate of fifteen per cent. per annum) for the period by which such crediting of the tax or any part thereof is delayed 51 Supra Note No.27, p 1.1136

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exceeding Rs.1000/- could be levied under Section 77 of the Act. According to Section 80 of the Act, no penalty shall be imposable on the assessee for any failure if the assessee proves that there was reasonable cause for the said failure so as to make sections 76, 77 and 78 inapplicable.52 3.7 Jurisdiction: In Google Online (India) Private Limited, In re:53, the Authority for Advance Ruling has held that it has no jurisdiction to decide whether the service provided would be a taxable service or not but the classification of the service would be within its jurisdiction and it was accordingly held that the provision of advertisement space to clients/advertisers in the website and assistance in preparing advertisement would constitute advertisement service and would be liable to service tax under Section 65(105) of the Finance Act, 1994. Similarly in the case of In Re Pfizer Ltd.54, it has been held that no advance ruling can be sought by a non-resident providing technical know-how in an on-going contract to classify such activity as being intellectual property service. Advance ruling can be sought only for services proposed to be provided. 3.8 Judicial Response: Import of services by taxpayers in India from those rendering services abroad would not attract liability to services tax prior to 18-04-2006 when Section 66A came to be inserted in the Finance Act, 1994 to treat the taxable services rendered abroad by non-residents as having been rendered by the recipient of the service in India to himself by enacting a deeming fiction for the purpose. In Indian National Ship-owners Association vs. Union of India55, the Bombay High Court has analysed the scope of liability to service tax in India for services rendered abroad by nonresidents and held that the mandatory provisions of Section 66A must prevail and no tax can be levied by framing a rule. Further, the Karnataka High Court in the case of CST vs. Bharat Electronics Limited56 has also held that liability to service tax is attracted for import of

52 53

Supra Note No. 27, p 1.1137 (2006) 280 ITR 211 54 (2006) 4 STR 84 AAR 55 (2009) 13 STR 235 56 (2010) 20 STR 307

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services in India only on and from 18/04/2006 and the service provider being a non-resident or a foreign company is not liable to tax in India prior to that date.57 In the case of Intas Pharmaceuticals Limited vs. CST58, it was observed that the special provisions in Taxation of Services (provided from outside India and received in India) Rules, 2006 are intended to avoid litigation and for determining valuation of taxable service when service is partly performed in India and partly outside India. Where taxable services are rendered wholly outside India, the proviso to Rule 3(ii) would not apply and the taxable services rendered prior to 18/04/2006 outside India would not attract tax in India. For instance, in the case of WNS Global Services Private Limited vs. CST59, back office support service covering data management and call centre services provided to clients abroad for which the money received in convertible foreign exchange have been properly accounted for had been subjected to service tax. However, drawings and designs, technical data, etc. supplied by foreign company as part of the collaboration would not attract service tax liability as observed in the case of BALCO vs. CCE (2008) 12 STR 7560

57 58

Supra Note No. 27, p 1.1140 (2009) 16 STR 748 59 (2011) 21 STR 202 60 Supra Note No. 27, p 1.1141

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CHAPTER FOUR CONCLUSION From the perusal of statutory provisions of the Income tax Act and various judicial pronouncements with respect to the scope of the tax liability of foreign technicians in India, it is clear that it is essential for the collaborators and their technicians to plan sufficiently in advance the basis and the extent of their liability to income tax in India whereby the burden of tax is kept at the minimum. Every possible care should be taken to bring the case of the technician within the terms of the double taxation avoidance agreements. The strategy to be adopted in regard to the employment of technicians for executing the collaboration projects covered by the agreements will have to be decided after a careful planning of the financial and tax implications thereof not only from the angle of the Indian enterprise but also from the angle of the foreign collaborator and the technicians who would visit India for the purpose. Judicial guidelines coming from the courts and tribunals will be useful guide in reaching a decision. In matters involving foreign collaboration and non-residents, the problem of service tax liability has become more serious and significant especially after the law has been amended to make the taxable services rendered even in foreign countries as liable to service tax in India and the recipient of the taxable service being treated as having rendered the service to himself by the deeming provision creating the fiction. Special attention has to be bestowed to identify the taxable service and the value thereof as well as the rate and amount of tax besides identifying the person liable to be assessed in India and the requirements to be fulfilled under the statute in each individual case to avoid liability to interests and penalties by discharging the tax liability to the extent lawfully attracted in every case.

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BIBLIOGRAPHY

PRIMARY SOURCES: 1. The Constitution of India, 1950 2. The Finance Act, 1994 3. The Income Tax Act, 1961

SECONDARY SOURCES:
1. R. Santhanam, Commercials Handbook on Double Taxation Avoidance Agreements & Tax Planning for Collaborations, 8th Edition, 2011 2. Rajaratnam S., Commentary on Double Taxation Avoidance Agreements, Part I,

WEB SOURCES: 1. http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2009ITAct/%5B2004%5D140 Taxman0405(Uttaranchal).htm 2. http://www.eximkey.com/contents/showpage1.asp?pageid=14350

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