The Supreme Court has upheld a Bombay High Court ruling saying that the Government cannot levy service tax on services provided outside the country. The order pertains to service tax for the period from March 1, 2002 to April 17, 2006. Acting on an appeal filed by the Centre, a Division Bench comprising Mr Justice S. H. Kapadia and Mr Justice Aftab Alam, said, “The special leave petition is dismissed”. It found no merit in the Centre’s contention.

The Government had gone in appeal against a Bombay High Court order. That order restrained the Government from levying service tax on the members of Indian National Shipowners Association (INSA) during the above said time-frame for services received by them outside India, from persons who are non-residents of India.

“The court has upheld the contention of the asseesees (INSA) that no service tax is leviable on import of services during the said period. This judgement settles disputes relating to taxation on import of services across different sectors. Hundreds of cases on this issue are pending before various Tribunals and courts,” said Mr Tarun Gulati, Partner, Economic Laws Practice, and counsel for INSA.

The Government had sought to levy service tax on such services first by a Notification in March 2002, followed by a Rule notified in August 2002, then another Notification under Section 68(2) of the Finance Act in December 2004, as well as in June 2005 by an Explanation to Section 65 (105) of the Finance Act and a Notification.

The High Court found that the provisions relating to service tax were applicable only to territories of India and there was no specific provision in the Act to levy service tax on services rendered outside India.

However, the Government enacted a specific provision – Section 66A of the Finance Act, 2006 – only on April 18, 2006, saying services, provided by non-residents to residents, should be treated as if the recipient itself had provided the service in India. The High Court said it is only after the enactment of Section 66A, and not prior to it, that the Indian recipient is taxed for services received from abroad.

There is a petition that has challenged the constitutional validity of the Section 66A. However, the Supreme Court in this case did not deal with that issue.

When contacted, the President of the National Association of Software and Services Companies (Nasscom), Mr Som Mittal, said, “We can’t see any area in which this order was applicable in the context of Indian IT services.”

A tax expert with a leading Indian IT firm pointed out that the apex court order will have a limited implication for IT services as software and services became a taxable category only from May 16, 2008 when IT Software Services (ITSS) was introduced.

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