1. The writ petition by the Indian Association of Tour Operators, seeks a declaration that Rule 6A of the Service Tax Rules, 1994 (‘ST Rules’), concerning ‘Export of services‘ is ultra vires the Finance Act1994 (‘FA’). The validity of Section 94 2 (f) of the FA is also challenged on the ground that it gives unguided and uncontrolled power to the central government to frame rules regarding ‘provisions for determining export of taxable services’.
2. The members of the Petitioner, who are Indian tour operators, are engaged in the business of arranging tours containing bouquet of services for foreign tourists visiting India as well as her neighbouring countries and consideration is generally received in convertible foreign exchange.
Background – prior to 1st July 2012.
1. Tour Operator services is a taxable service.
2. Under powers of Sections 93and 94 (2) (f) of the FA, the central government issued the Export of Services Rules 2005 (‘ESR 2005’).
3. It states that “export of taxable services shall in relation to taxable services specified in sub-clause (n) of clause (105) of Section 65of the Act, be provision of such services as are performed outside India”. The proviso thereto stated that where such taxable service is partly performed outside India, “it shall be treated as performed outside India.”
4. Amended Rule 3 (2) of ESR 2005 states that the provision of any taxable service specified in Rule 3 (1) shall be treated as export of service when the following conditions are satisfied, viz.:
(a) omitted ; and
(b) payment for such service provided outside India is received by the service provider in convertible foreign exchange.
5. Rule 4 of the ESR 2005 stated: “Any service, which is taxable under clause (105) of Section 65of the Act, may be exported without payment of service tax.”
6. Thus the services provided by such tour operator was not exigible to service tax.
FA amendment in July 2012
1. Post amendment, the collective reading of Section 66Bread with Section 64 (1) and Section 65B (52) makes it simple that service tax is leviable only on services provided or agreed to be provided in the ‘taxable territory’. The net result is that services rendered outside the taxable territory of India would not be a ‘taxable service’ for the purposes of the FA.
2. The rule-making power of the central government is contained in Section 94 of the FA.
3. Section 66 C of the FA empowers the central government to make rules for determining the place of provision of service. The expression ‘such services’ in the above provision has to necessarily refer only to ‘taxable services. In terms of Section 66C of the FA, the central government had made Place of Provision of Services Rules 2012 (‘PPSR 2012’).
Analysis of Rule 6A
1. “6A Export of services –
(1) The provision of any service provided or agreed to be provided shall be treated as export of service when –
(a) the provider of service is located in the taxable territory
(b) the recipient of service is locate outside India
(c) the service is not a service specified in the Section 66D of the Act,
(d) the place of provision of the service is outside India
(e) the payment for such service has been received by the provider of service in convertible foreign exchange and
(f) the provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 3 of clause (44) of section 65B of the Act (2) Where any service is exported, the Central Government 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 and the rebate shall be allowed subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by Notification.”
2. A significant change is that Rule 6A brings within its ambit export of even non-taxable services whereas Section 94(2) (f) permits making rules only in respect of ‘taxable service’.
3. Rule 6A (1) of the ST Rules creates two problems for the Indian tour operator organising tours for foreign clients.
4. While clauses (a) (b) and (c) are satisfied inasmuch as the tour operator is located in India, the recipient is located outside India, and the service is not included in the negative list under Section 66 D of the FA, clause (d) may not be satisfied where the service provided is a composite one viz., the place of provision of a part of the service is inside India and the remaining part outside India.
5. The second issue that arises is that such service provided outside India cannot be made amenable to service tax under the FA since it is not a service rendered in the ‘taxable territory’.
6. Further sub-rule (2) of Rule 6A states that the central government may by notification grant rebate of service tax or duty paid input services or inputs subject to conditions where there is an export of services. This pre-supposes that such provision of service outside India is in fact amenable to service tax.
7. Also Rule 9 of the PPSR 2012 which states that where services provided are intermediary services, then the place of provision of service “is the location of service provider.” As per Education Guide, Such tour operator will qualify as ‘intermediary services. ‘Thus even where in terms of Rule 6A of the ST Rules, the service provided outside India by the Indian tour operator it is an ‘export of service’, under Rule 9 of the PPSR 2012 the place of provision even for such service would be “the location of the service provider” which would make it a service provided in India, when in fact it is not.
8. Hence, the services provided by such tour operators in relation to organising foreign tour does not fall within the definition of “export of services” and is thus chargeable to tax.
For all the aforementioned reasons, the Court declares that:
(i) Rule 6A (1) read with Section 6A(2) of the ST Rules, insofar as it seeks to describe export of tour operator services to include non-taxable services provided by tour operators, is ultra vires the FA and in particular Section 94 (2) (f) of the FA and is, therefore, invalid.
(ii) Section 94(2) (f) or (hhh) of the FA does not empower the central government to decide taxability of the tour operator services provided outside the taxable territory. They only enable the central government to determine what constitutes export of service, the date for determination of the rate of service or the place of provision of taxable service.
(iii) Section 66 C of the FA enables the central government only to make rules to determine the place of provision of taxable service but not non- taxable service.
(iv) The net result is that the services provided by Indian tour operators to foreign tourists during the period 1st July 2012 to 1st July 2017, which has been paid for in convertible foreign exchange would not be amenable to service tax.