CA. PRADEEP JAIN, CA. PREETI PARIHAR
After six years of uncertainties, finally section 66A of the Finance Act, 1994 has few more days to survive. 1.7.2012 is the day when this section will cease to exist. On this date, Export of Services Rules, 2005 and Taxation of services (Provided from outside India and received in India) Rules, 2006 will also extinguish. In place of these, a new charging section 66B will come into force and instead of import-export rules, a new set of rules namely, Place of provision of services rules, 2012 will be implemented. In this article, an effort has been made to bring out its impact on the import of intermediary services from abroad.
New charging section:-
Under negative list, new charging section has been proposed in the Finance Act, 1994 which is section 66B. This section reads as follows:-
“66B. There shall be levied a tax (hereinafter referred to as the 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 beprovided in the taxable territory by one person to another and collected in such manner as may be prescribed.”
Thus, according to new charging section, all the services provided in the “TAXABLE TERRITORY” will be taxable unless specified in the negative list or under mega exemption notification. The word “taxable territory” means the whole of India except Jammu and Kashmir. Thus, if the services are provided at a place outside taxable territory, it will be exempted.
Where the service is provided?
The new charging section says that the services provided outside taxable territory will not be chargeable to tax in India unless otherwise provided. Now, where the services are actually provided is the key determinant of the taxability of a service. There may be cases where the provision of service may be deemed at the place of service provider as well as at the place of service recipient. In order to meet these ambiguities and to determine the place of providing the service, the Place of Provision of Services Rules, 2012 have been proposed.
Intermediary services and Place of provision of services Rules, 2012:-
Rule 9 of Place of provision of service rules provides that the place of providing of service will be deemed as location of service provider in case of services specified under this rule. This rule reads as follows:-
“Place of provision of specified services.- The place of provision of following services shall be the location of the service provider:-
a) Services provided by a banking company, or a financial institution, or a nonbanking financial company, to account holders;
b) Telecommunication services provided to subscribers;
c) Online information and database access or retrieval services;
d) Intermediary services;
e) Service consisting of hiring of means of transport, upto a period of one month.
The rule 9 includes the “intermediary services” in the list of specified services on which this rule applies. The intermediary services being explained in guidance note 3 issued by TRU as follows:-
An “intermediary” is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two supplies at any one time:
i) the supply between the principal and the third party; and
ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.
For the purpose of this rule, an intermediary in respect of goods (commission agent i.e a buying or selling agent) is excluded by definition. In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered:-
Nature and value: An intermediary cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back to the principal.
Separation of value: The value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as “commission”.
Identity and title: The service provided by the intermediary on behalf of the principal is clearly identifiable.
In accordance with the above guiding principles, services provided by the following persons will qualify as ‘intermediary services’:-
i) Travel Agent (any mode of travel)
ii) Tour Operator
iv) Commission agent [an agent for buying or selling of goods is excluded]
v) Recovery Agent
Even in other cases, wherever a provider of any service acts as an agent for another person, as identified by the guiding principles outlined above, this rule will apply.
Thus, the rule 9 specifies in case of specified services, place of provision of service will be location of service provider. The list of specified service includes intermediary services. The intermediary services have been specified as tour operator, stock broker, travel agent, commission agent (except buying & selling agent) and recovery agent. Thus, on these services if imported from outside India; rule 9 of Place of provision of services rules will be applicable and accordingly, the place of providing the service will be deemed to be location of service provider, i.e. non taxable territory. Accordingly, no service tax would be levied under section 66B as the service is deemed to be provided in non taxable territory.
Impact of rule 9 of POP Rules, 2012:-
“Intermediary services” has been specified as one of the services on which rule 9 is applicable. Intermediary services include the mediator/agent who act on behalf of any person commonly known as principal. Thus, where a person located in abroad acts on behalf of the principal located in India and in turn receives commission from Indian principal, though it will be deemed as import of service from abroad, still no service tax would be payable in view of rule 9 of POP Rules, 2012. Further, travel agents are also included in this rule. The availment of services of foreign travel agent is very common practice in big hotels. In terms of rule 9, the place of the service in such cases would be Location of service provider, i.e. the location of foreign travel agent, which is outside the taxable territory of India. Therefore, the transaction will be exempt from the service tax. This provision resembles to the notification no. 13/2008-ST dated 1.3.2008 where the commission received from foreign travel agent was exempt subject to certain conditions. Thus, the benefit of this notification is being carried onto negative list without any conditions.
Principal-agent v/s principal to principal relationship:-
If the agent-principal relationship is satisfied between the service provider located in abroad and principal located in India, these will be treated as intermediary services (except in case of buying-selling agent). However, if both the parties are acting on principal to principal basis, the services provided from abroad will not be considered as intermediary services. As such, the rule 9 will not be applicable, rather, the general rule 3 of these rules will be applicable which reads as follows:-
“3. Place of provision generally. – The place of provision of a service shall be the location of the service receiver”
Therefore, if the relationship between the foreign service provider and the Indian recipient is on principal to principal basis; the rule 3 will be applicable and thus in that case, the place of providing the service shall be deemed as the place of service receiver, i.e. India. Therefore, in this case, since the services are deemed to be provided in taxable territory, service tax would be payable by the recipient of services located in India.
Rule 9 v/s rule 3 of POP services Rules, 2012 – a tax planning tool:-
In the cases where the service provider is located abroad and service recipient is located in India and where the nature of service is arranging or facilitating the supply of goods, or a provision of service, or both, between two persons; if one is able to prove the agent principal relationship, service tax may be avoided. We can say that eventhough both the service provider and recipient have been acting on principal to principal basis and consideration received may be in nature of profit; but in future for tax planning, the agreement will more likely be draft in a manner to reflect that there is agent-principal relationship and the consideration so received is “commission”. Thus, one door is being opened to enjoy the tax exemption in like cases under the above rules.
If everything is fine as above, then where’s the problem?
All the above discussion indicates that many of the imported services that are taxable under the current provisions will become exempt under negative list. This doesn’t seem to be the intention of the government. If it was the intention of law makers, then in the notification no. 15/2012-ST dated 17.3.2012, clause no. 10 would not have been inserted. This notification prescribes the person liable to pay the service tax in specified cases. Clause no. 10 reads as follows:-
“in respect of any taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory” – the 100% service tax will be payable by the service recipient.
Thus, under reverse charge method if the service is “PROVIDED BY A PERSON LOCATED IN NON TAXABLE TERRITORY” and is “RECEIVED BY A PERSON LOCATED IN TAXABLE TERRITORY”, the service tax will be payable by the service recipient. In other words, in each and every case, where the location of service provider is non taxable territory and location of service recipient is taxable territory, the service tax will be payable by the service recipient. But how this notification will work? If we read charging section 68, it indicates that the in order to be chargeable to service tax, the service should be provided in taxable territory. If not provided in taxable territory, no service tax would be levied. Read with this section, the Place of provision of service rules, 2012 have been issued which determines what will be the place for providing the service? If the place for providing the service is taxable territory as per these rules, pay the service tax and if the place of providing the service is non taxable territory, no service tax is payable. On the other hand, the above notification no. 15/2012-ST even does not speak where the service should be provided? It simply says that the service should be provided by a person located in a non taxable territory and it should be received by the person located in taxable territory and if these two conditions are satisfied, the recipient of the service will be liable to pay the service tax.
Now if we read charging section 68 with Place of provision of services rules, 2012; there is absolutely no doubt. However, if we read section 68 with notification no. 15/2012-ST, both contradicts as section 68 gives emphasis on the “place of providing the service” whereas notification emphasizes on “location of service provider & recipient”. Going further, if we read all the three – section, notification and rules all together, everything is mess up and no clear derivation may be made. It needs the timely clarification else the situation will be even worse than earlier section 66A.
While winding up:-
Government has made serious efforts to replace existing section 66A, Export of Services Rules, 2005 and Taxation of services (Provided from outside India and received in India) Rules, 2006 by the section 66B, Place of Provision of services Rules, 2012 and Notification no. 15/2012-ST dated 17.3.2012. But whether these efforts will pay the government or the unfortunate assessees will pay for this “Bermuda Triangle” created by the negative list…