Manish Sachdeva
The Hon’ble High Court of Delhi has announced a crucial verdict in the case of Indian Association of Tour Operators vs Union of India [W. P. (C) No. 5267 of 2013] (‘Tour Operators case’). The Court has axed Rule 6A of the Service Tax Rules, 1994 (‘the Rules’) on the ground of being unconstitutional and falling from the vice of Excessive Delegation. The Judgment if not reversed by the Hon’ble Supreme Court, has the capacity to cause major repercussions in the now repealed Chapter V of Finance Act, 1994 ( ‘the Act’). The discussion in the present article is mix of the judgment and the generality of Service Tax Law. Let us go on then;
A. THE LOCUS STANDI OF PLACE OF PROVISION
The fiscal laws are intra territorial legislation, take for any taxation law, be it income tax or value added taxes, they sought to tax the “subject” only within the landmass of India. Contrarily Civil and Criminal legislations such as FEMA, extends to exterior jurisdictions as well, majorly to protect the civil (and honest?) society.
Intra Territorial jurisdictions of Tangibles
On the physical subjects like goods, it’s easy to observe the intra territorial jurisdiction i.e. the physical bounders of Indian Landmass are benchmarks. Excise Duty is very good example and perhaps the only tax legislation having less trouble with the territorial disputes. Excise duty is leviable on the goods manufactured “in India”, period.
Intra Territorial jurisdictions of Intangibles
When it comes to intangible subjects’ viz. “Incomes” under Income tax Act, 1961 or the exceedingly disputed “Services” under the Finance Act, 1994 (‘the Act’), the intra territorial jurisdiction is a headache for both the tax legislatures as well as the taxpayers. Therefore there is bound to have some fiction to determine the territorial jurisdiction for the intangible subjects. Section 9 of the Income tax Act defines when an income is said to be taxable in India and we are well witness to the paramount disputes under the Income Tax over such territorial power to levy tax.
The discussion here is in the context of wild animal Service Tax. Service Tax Law has been and will forever be (in its latest form under GST) under the gauge of Territorial Disputes, why, because there is unavoidable fiction.
The Standardization and departures of POPS
Place of Taxation (‘POT’) is a widely accepted term in worldwide VAT/GST legislation. POT defined by the OECD are set of standard principles, for determination of tax jurisdiction of a legislature. Take for an example, Netflix, an American based organization provides entertainment services to users located in India, and earns a consideration. Say, the consideration for providing entertainment is exempt in America, while it is taxable in India. The transaction can be subject to the rules of either of the jurisdiction, while determining so, POT comes into picture. Say, the POT for entertainment services are common in both America and India, and provide that tax shall be leviable on the consideration if the place of consumer is the jurisdiction. In the example, America authorities cannot ask Netflix to pay tax on the consideration since the location of consumer in such case is not in America, on the same principles, India authorities have the jurisdiction to ask for tax from Netflix since the consumer of services are located in India.
Place of Provision of Services Rules, 2012 (‘POPS’) as we know them, have more or less the sanctity of international standards, however the departures and convergence are at the mercy of Parliament and Central Government and whose connotations are at the wisdom of Judiciary. These are strong words, more in the nature of conclusion, but pointed out first hand, just to set a background.
B. PLACE OF PROVISION AS UNDERSTOOD
Service tax is (was) leviable under the erstwhile Section 66B of the Act. Section 66B has many limbs, one being that for a service to be taxable, it should be “provided or agreed to be provided ‘in’ the taxable territory”. The taxable territory means “whole of India except the State of Jammu and Kashmir” as per Section 65B (52) read with Section 64 of the Act. The net result therefore is that Service tax is leviable on the services provided ‘in’ whole of India except State of J & K.
[Enhanced Emphasis on the words “IN”]
Section 66C of the Act is rule making power handed to the Central Government (‘CG’) for determining the…….
“the place where such services are provided or deemed to have been provided or agreed to be provided or deemed to have been agreed to be provided.”
Similarly Section 94 (2) (hhh) of the Act is general rule making power handed to the CG to make rules for determination of
“the date for determination of rate of service tax and the place of provision of taxable service under section 66C”
Drawing power from the above two provisions, POPS were issued for defining rules for determination of the place of provisions of various services, specified and generally. Accordingly, the taxability of services is arrived after application of Section 66B ibid read with POPS. To say it easily;
- Service tax is leviable on the services which fulfils the conditions of Section 66B ibid and whose place of provision as per POPS is in taxable territory and
- Service tax is not leviable on the services which although fulfils the conditions of Section 66B ibid, however whose place of provision as per POPS is outside the taxable territory.
Therefore, the locus standi of POPS is that of a legal fiction created by the CG to determine when a service will be deemed to be provided in taxable territory and when the same shall be extra territorial and hence not leviable to tax in India.
C. THE EXPORT CRITERIA
At this juncture, it is also important to talk over the export criteria. Rule 6A of the Rules is another delegated provision to CG. Sub Rule 1, provides the six conditions on which a service must stand out for being classified as export of service. Sub Rule 2, enacts the power of the CG to provide for any benefits on account of Exports.
The export event is are different from non-taxable event. Look closely and the major difference one can see between the export event and non-taxable event is the existence of “Convertible Foreign Exchange” in the former event. Rule 6A draws power from Section 94 (2) (f) of the Act.
D. THE CASE OF TOUR OPERATORS
The Petitioners
The petitioners in the case are Association of Indian tour operators engaged in the business of arranging tours for foreign tourists visiting India as well as her neighboring countries. They enter into contracts with the foreign clients either directly or through foreign tour operators. They make all arrangements for the foreign tourist including hotel accommodation, transport, monuments visits, food and restaurant bookings etc. Members of the Petitioner organize package tours which include a bouquet of services. It was stated that the foreign tourists/foreign tour operators make the entire payment for the package tour in convertible foreign exchange.
The Contentions of the Petitioners
The petitioner made out a case, that their services are being performed not in the taxable territory, for doing their hard work, they are getting the payments in Foreign Convertible Exchange for the outside customers. However, while on one hand they are being denied the benefits of exports of service, at the same time they are being burdened with huge service tax liabilities. The petition main challenges included;
- POPS are inconsistent with the Intra Territorial Jurisdiction to levy tax in as much as their services though performed outside the taxable territory, but by fiction of Section 66C ibid read with POPS are deemed to be within the taxable territory
- Rule 6A clause (d) tends to create an anomaly in as much as it seeks to tax the non-taxable services
- Rule 6A and Rule 9 of POPS being arbitrary and violative of Article 14 and 19(1) (g) in as much it creates unintelligent differentia between India Tour Operators and Foreign Tour Operators
E. THE RATIO OF THE COURT
The Hon’ble High Court went on to discuss various provisions of the Service Tax Law held as under;
- The service tax will be leviable only on the services rendered ‘IN’ the taxable territory (para 19)
- Determination of Place of Provision can only be qua the taxable services as defined under Section 66B, the place of provision cannot be determined for services which are not provided ‘IN’ India (para 21)
- Rule 6A sub rule 2 pre supposes that only non-taxable services can be subject to export, while section 94 (2) (f) in the first place cater to services which are taxable under the Act. (para 24, 26)
- Neither Section 94(2) (f) ibid empowers the CG to define export criteria of non-taxable services nor does Section 94(2) (hhh) ibid empower it to define the place of provision of non-taxable services. (para 44)
- Subjecting certain types of services to tax is an essential legislative function, and cannot be delegated to the CG. Further the Legal fiction (of Place of Provision) of treating services outside India cannot be delegated to CG (para 44, 48)
- Rule 6A in as much it imposes a tax on non-taxable services is ultra-virus of the Act. Something which is impermissible by the statute cannot be done through Rules. Rule 9 of POPS is also invalid as it seeks to tax something non-taxable. (para 46,47)
- Rule 6A also suffers from the vice of Excessive Delegation, if the CG is given to determine the taxability of services (para 53)
- The fact that some part of petitioners’ activity may be subject to service tax owing to the fact that some portion of services are performed in India is not much to the assistance to Revenue. The logic described being that in sigma of taxable and non-taxable supplies, the former can be brought to tax only through some machinery provision provided by statute. That being not the case herein, tax cannot be imposed even on the portion of services performed in India. (para 52)
F. POINTS FOR DISCUSSION
In all fairness to the decision, the order has created more uncertainties while providing scarce certainty. Some important observations are discussed below;
1. What shall constitute “IN” the taxable territory
The Court observed that performance of service should be “IN” the taxable territory to become exigible to services tax. The genesis of the word “IN” are propounded from the language of Section 66B ibid and Section 64 ibid. On the other hand, Section 66C uses the words “PLACE” where a services shall be said to provided, the mischief was always there.
The understanding of the word “IN”, before the pronouncement was that “IN” should be determined by the application of POPS i.e. whosever service’s place of provision falls within the taxable territory shall be considered as “IN” the taxable territory. The Court on the other hand, degraded POPS to lifeless law. The Court held that POPS are subsidiary provision of Section 66C and 94 (2) (hh) which in turn are subsidiary provisions of Section 64 and therefore they are to be applied to only qua services taxable under the Act.
While in the case in hand, the Court placed reliance on the erstwhile Export of Service Rules, 2005 (‘EOS’). The EOS in isolation provided that performance of the service is the criteria to determine whether the services are “IN” the taxable territory or outside of it. Without enunciating the principles to determine performance, the Court laid importance on the modus operandi of the petitioners and held the services be performed outside India. The Court also relied on the meaning of Export of Service under the Foreign Trade Policy 2009-14. The words performance have been subject to the point of interpretation before Courts many a times, most notably in Paul Merchants Limited 2013 (029) STR 0257 (Tri. – Del.).
The judgment has created a Conflict, resulting in an infinite loop. POPS are Indigenous term for POT while on one hand POPS are the principles, through which the CG is determining the taxability of services in India, the Court has ruled that POPS are applicable once the taxability of services occurs in India under Section 64. In other words, the CG applies Section 66C before the application of 64, while the Court ruling the other way round. Such merry go round has brought the law back to that of pre negative list regime, making Section 66C otiose.
2. POPS are fiction of law – Excessively delegated
As noted above, POPS are principles to determine the tax jurisdiction. The POPS are defined fictionally because they cannot be implied or spelt out expressively. The Court has held that because POPS have the audacity to determine taxability and non-taxability of something, they necessarily have to be enunciated by the Parliament in the Statute. The power of taxability cannot be rest on the shoulders of the CG, hence any enunciation of POPS through Rules falls under the vice of Excessive Delegation.
At this juncture, it is important to bring to a light such a situation caused by the CG in the year 2014 vide Notification No. 14/2014 effective from 01/10/2014. Prior to such notification for services provided by Commission agent of goods, the place of provision was determined under Rule 3 i.e. based on the location of service recipient, however with such notification the place of provision of the services was shifted to Rule 9 i.e. based on the location of service providers. India Commission Agents services’ to offshore clients, became taxable overnight on 01/10/2014. While the Court didn’t demonstrated such situation, however realistically held that such power of CG to determine taxability suffers from Excessive Delegation.
In fairness to the CG, most of the POPS rules are in compliance of the destination principles of a VAT. At the same time it cannot be denied that the POPS are wild horses in the hands of the CG because the Parliament didn’t spelt out any policy while allowing the CG to frame POPS. Some safeguards in the Statute while giving CG the power to frame POPS might have saved the said from the wrath of the Court.
3. Chapter V is subject to Section 64
It’s settled fact that a pre amble of a statute bounds the other provisions contained therein. It will be of ease to reproduce relevant provisions of the law to see the light given by the Court in the judgment;
SECTION 64
(1) This Chapter extends to the whole of India except the State of Jammu and Kashmir.
(2)………………………………….
(3) It shall apply to taxable services provided on or after the commencement of this Chapter.
SECTION 65B
(52) “taxable territory” means the territory to which the provisions of this Chapter apply;
SECTION 66B
There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen percent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
A plain reading of Section 66B shows that service tax shall be applicable on the services provided within the taxable territory, taxable territory in turn is defined to mean “India except the State of Jammu and Kashmir” under Section 65B (52) read with 64 (1). Further Section 64 (3) provides that the provisions of Chapter V shall apply only on the taxable services.
The net result of above two provisions is that all the provisions of Chapter V shall apply on the taxable services, while none of the provisions shall apply on the non-taxable services viz. services provided outside India that are non-taxable services shall not be bounded by any provision of the Act, be it
- Rules made under Section 94 of the Act, because they are also subject to the provisions of Section 64 (3), moreover, the wordings inherited by it “carry out the provisions of the Chapter”, also imply that Rules can only be made qua the levy enforcement and collection of tax.
- Export Criteria under Section 94 (2) (f) read with Rule 6A ibid in as much as they cater to enforce extraneous conditions on a non-taxable services to be labeled as export
- Place of Provision Criteria under Section 94 (2) (hh) read with Section 66C in as much as the Rule 9 of the POPS seeks to fictionally render the services rendered outside India as rendered within India and be exigible to tax.
- Provisions of Section 93B of the Act which applies the rules made under Section 94 ibid even on the services other services cannot be given over-riding force over Section 64. The words ‘any other service’ occurring in Section 93B is subject to Section 64 (3) of the FA that precedes it. It cannot expand the scope of Chapter V itself. Section 93B cannot expand the jurisdiction of Service Tax.
4. Impact on the Cenvat Reversals
The above finding that Rules made under Section 94 are subject to Section 64 and are applicable only with respect to taxable services, can have wider ramifications under the Cenvat Credit Rules, 2004 (‘CCR’). Rule 6 (1) and Rule 6 (4) disallows the Cenvat Credit of Inputs, Input Services and Capital Goods if they are used partially or wholly in the provision of exempted services. Exempted Services are defined to include services out of the ambit of Services viz. non-taxable services vide Rule 2 (e) of the said rules. The Judgment seeks to kill the somewhat mischief adopted by the CG in denying the Cenvat against Non-taxable Services.
The judgment shall also render the Rule 6 (8) otiose in the sense that once the services are said to be provided outside India, there can be no consequence of Cenvat even if the consideration is not received in CFE or even if not received altogether.
5. Rule 6A cannot tax the non-taxable
Out of some sense of consolidation, EOS were converted into Rule 6A, clause (d) of Rule 6A in turn referred to POPS.
5.1 Contradiction with tax jurisdiction rule
The primary resentment, the Court observed with Rule 6A is with clause (d) of Sub Rule (1) i.e. for being an export of services, the place of provision should be outside India, meaning thereby, there can be exports of only “non-taxable services”. This proposition is in direct contradiction of Section 64 ibid since Rule 6A draws the power from Section 94(2) (f) which itself is limited towards taxable services only. Therefore any provision which seeks to implement Export criteria on non-taxable services is ultra-virus of the Finance Act.
Mutually Exclusivity of Export and Non Taxable?
In other words, the Court ruling gives the impression that export and taxability are not mutually exclusive, but is it? The POPS read with clause (d) of ibid very clearly imply that only the services which are non-taxable can be appraised to see if they are export, if they are taxable per se in India, there is no question that they can be called as Export. This question is one that shouldn’t have been arisen and is arisen merely because the Court has viciously rendered POPS lifeless. A levy cannot have two tax jurisdiction determination principles, one dependent on POPS and the other one on the wisdom Court, and that’s the fundamental glitch in the judgment.
5.2 The Fiction and the power
If one were to take that only by fiction of law that the situs of a service can be determined– being provided in the taxable territory or outside the territory, the fiction has to be enacted by the statute and not by the CG. The Court took note of the amendment in Article 286 of the Constitution of India. Article 286 was amended by the GST Constitutional Amendment Act, 2016 to provide that no State shall have to power to impose tax on the supply of services taking place export outside India.
The Court held that such amendment is an indication that Export Criterion cannot be delegated to CG. Therefore Rule 6A (d) of the Rules and Section 94(2) (hhh) in as much they determine the situs of service provided outside the territory as within the territory results in Excessive Delegation, hence not a valid piece of law.
5.3 Reliance on Foreign Trade Policy
Rule 6A is a pro tax provision, which at many occasions ignores the realities. In principle, a service should be treated as export if it is provided to a consumer located outside India, and Forex is earned. The regressive nature of Rule 6A can be seen through a comparison of Export defined under Foreign Trade Policy 2009-14 (‘FTP’);
| FTP Para 3.11.1 | Rule 6A |
| Export of Services | (1) Export of Service is where |
| Include all 161 tradable services covered under GATS – Appendix 10 of HBPv1 where payment for such services is received in free foreign exchange | (a) Provide is located in taxable territory
(b) Recipient is located outside India (c) Services is not specified u/s 66D (d) Place or Provision is outside India (e) Payment is received in CFE (f) Provider and Service are separate legal entities |
| (2) CG may, by notification, grant rebate of service tax or duty paid on input services or inputs, as the case may be, used in providing such service |
While the Court did take obedience of the definition of Export of Services as given in FTP. Not much can be taken from such observation however, primarily because FTP and Finance Act serves different objectives. It is still astonishing how the definitions are not synced.
6. Composite Transaction
The Court noted that since the petitioners’ services are combination of large number of individual activities for e.g. planning, scheduling and organizing the tour, booking of accommodation in hotels in India and foreign countries, making travel and transport arrangements, arranging visa and travel insurance, sight-seeing trips, etc., concluding that some of these services are provided in the territory outside India, some possibly within India.
The Court went on to say that even if the portion of services provided in taxable territory were to be taxed, appropriate machinery provisions should have been there to segregate such taxable portion from lump sum consideration of the whole.
The concept of POPS seems to be defeated by such observation. If POPS were to be given full force in situation of Composite Contracts as above, and services are to be construed as Tour Operators Service, the place of provision would come to be the location of service provider vide Rule 9, therefore rendering the whole lump sum exigible to service tax. However, as held earlier, POPS are not the correct criteria to determine taxability of services, a brutal assassination.
7. Implications under GST
Another thing can be observed is that unlike POPS, Place of Taxation is enacted in the statute itself under the GST Regime, refer Section 12 and 13 of Integrated Goods and Services Tax Act, 2017. The principles are mirror replica of POPS for inbound and outbound services. The Court having already declared the ratio being limited to 30 June 2017. Besides, the provisions of Exports are also more or less similar to the erstwhile regime, also enacted under the statute itself.
Therefore, transactions under GST are not supposed to be impacted by the ratio.
All and all, it can be said that the judgment is welcome judgment, mainly because the POPS qua Export have potentially hurt the business practices across the nation. Large amount of amount is in disputes (both of taxability and of Cenvat Refunds) because they are poorly employed by the Revenue Officials. However, the fundamental problem one can see in the judgment is that POPS altogether are degraded rather than harmoniously sounded. The challenge before Supreme Court is pretty much certain, but at least for the time being the nation can breathe.
(Author can be reached at manish619sachdeva@yahoo.in)
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