Preliminary
Under the Export of Services Rules, 2005 (ESR) which were in force prior to 01/07/2012, it was provided in Rule 4 that, any service which is taxable under clause (105) of section 65 of the Finance Act, 1994 (‘Act’), may be exported without payment of service tax. Further clarifications were issued in the context of proportionate credit rules under CENVAT Credit as to the treatment to be given to “exported services”.
W.e.f. 01/07/2012, ESR have ceased to exist, and Place of Provision of Services Rules, 2012 (POP Rules) have been introduced. Importantly, for the first time, the concept of “exported services” has been specifically introduced under Service Tax Rules, 1994 (ST Rules).
This feature discusses the concept of “exported service” and consequent implications in terms of CENVAT Credit Rules, 2004 (CENVAT Rules) and Point of Taxation Rules, 2011 (POT Rules) in regard to “exported services” However, it needs to be expressly noted that, for determination as to whether a service constitutes “export” or not, provisions under ST Rules should be read with the provisions under POP Rules.
Relevant Statutory Provisions
ST Rules Rule 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 located outside India,
c) The service is not a service specified in 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 2 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.”
CENVAT Rules
Rule 2(e) “exempted service” means a –
(1) Taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) Service, on which no service tax is leviable under section 66B of the Finance Act; or
(3) Taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken; but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994”.
Rule 5: Refund of CENVAT Credit
“(1) A manufacturer who clears a final product or an intermediate product for export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT Credit……… Explanation 1 – For the purpose of this rule – (1) “export service” means a service which is provided as per Rule 6A of the Service tax Rules, 1994.”
Rule 6 – Obligation of a manufacturer or producer of final products and a provider of output service “………..
(7) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the taxable services are provided, without payment of service tax, to a unit in a Special Economic Zone or to a developer of a Special Economic Zone for their authorized operations or when a service is exported.
(8) For the purpose of this rule, a service provided or agreed to be provided shall not be an exempted service when –
(a) the service satisfies the conditions specified under rule 6A of the Service Tax Rules, 1994 and the payment for the service is to be received in convertible foreign currency; and
(b) Such payment has *not been received for a period of six months or such extended period as may be allowed from time-totime by the Reserve Bank of India, from the date of provision.” [*Note: The use of the word ‘not’ appears erroneous].
Exported Service – Whether “taxable service” or “exempted service”
Under Central Excise, it has been a settled position that, exported goods are in the nature of taxable goods and not exempted goods. However under service tax, there was no clarity and issues continued to be raised. In the context of CENVAT Credit, vide Circular No. 868/6/2008 – CX dt. 9/5/08 it was clarified, as under: ……………
6 Whether export of service without payment of service tax under Export of Service Rules shall be treated as exempted service for the purpose of rule 6(3)?
No, export of services without payment of service tax are not to be treated as exempted services. W.e.f. 01/07/2012, Rule 2(e) of CENVAT Rules which defines “exempted services”, clearly provides that, services exported in terms of Rule 6A of ST Rules, would not be “exempted services”.
However, it needs to be expressly noted that, this is for the purpose of CENVAT Rules only.
Brief Analysis of Rule 6A of ST Rules – “export of service”
Each of the specified conditions is discussed hereafter.
a) Service provider should be located in the taxable territory. This is in line with the concept of export which presupposes that service is usually provided from taxable territory to non– taxable territory. In this regard, the following definitions under the Finance Act, 1994 as amended (FA12) need to be noted.
Section 64 of FA 12
“(1) This Chapter extends to the whole of India except the State of Jammu and Kashmir.” ……… Section 65(27) of FA 12 “ ‘India’ means, –
(i) the territory of the Union as referred to in clauses (2) and (3) of article 1 of the Constitution;
(ii) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters. Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976);
(iii) the seabed and the subsoil underlying the territorial waters;
(iv) the air space above its territory and territorial waters and (v) the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof;” Section 65 (52) of FA 12 “ “Taxable territory” means the territory to which the provisions of this Chapter apply.” Thus, simply stated, service provider should be located in India except in the State of Jammu & Kashmir.
b) Service recipient should be located outside India. Here also, it is to be understood that Jammu & Kashmir is otherwise a non-taxable territory. However, if recipient is located in Jammu & Kashmir, the condition of location outside India is not satisfied. This is also in line with the general concept of ‘export’.
c) Service should not be a service specified in the Negative List of Services under section 66D of FA 12. This is very important inasmuch it spells out an important legislative intent that services which are specified in the Negative List are totally excluded from the service tax ambit. Hence, the question of the same being regarded as ‘export’, does not arise at all.
d) The place of provision of service is outside India. This does raise many questions inasmuch as POP Rules contemplate that services could be provided by a service provider based in the taxable territory to a service recipient based in a non–taxable territory.
For instance, if the services are physically provided/performed outside India, the same would be completely out of the service tax ambit and hence, the question of the same being considered as ‘export’ would not arise at all. This anomaly also existed under ESR which was in force prior to 01/07/2012.
In this regard, attention is drawn to the following clarifications by the department in the context of some specific services:
CBEC Circular No. B-11/3/98-TRU dt. 7/10/98 – Market Research Agencies
Para 6.3
“An issue has been raised whether service tax is payable in respect of services rendered to foreign clients in India, and in respect of such services rendered abroad. It is clarified that service tax is payable on all taxable services rendered in India whether to an Indian or foreign client. However, services rendered abroad shall not attract service tax levy as service tax extends only to services provided within India.”
Dept Trade Notice No 1/2000 dt. 27/4/2000, Pune I – Tour Operator Services
Para 6.7
“Service tax on services rendered by tour opera-tors is only on services rendered in India in respect of a tour within Indian Territory. Services rendered by tour operators in respect of out-bound tourism i.e. for tours abroad, do not attract service tax. In case of a composite tour which combines tours within India and also outside India, service tax will be leviable only on services rendered for tours within India provided separate billing has been done by the tour operators for services provided in respect of tours within India.”
This remains an unresolved issue. Possibly the only logical reason appears to be treatment for determination of availability of CENVAT Credit.
e) Realisation of consideration in convertible foreign exchange by a service provider. Compliance of this condition has assumed increased significance.
It needs to be expressly noted that, w.e.f. 01/07/2011, POT Rules have been introduced, whereby there is a liability to pay service tax on the service provider irrespective of realisation from the service recipient. Hence, in cases where consideration is not received (either fully or partly) by a service provider from the service recipient within the time limit permitted by RBI, the benefit of export would be denied subject to discussion in paras hereafter and service tax liability may be triggered from the date of completion of service in terms of POT Rules with applicable interest.
In cases where payments are not received by an exporter service provider within the time permitted by RBI, it would be advisable that appropriate procedure under RBI Regulations (like seeking an extension of time for unrealised proceeds) are complied with by service providers.
(f) Service provider and service recipient should not be merely establishments of a distinct person in terms of Explanation 2(b) (should be read as 3) to section 65B(44) of the Act which defines ‘Service’. The said explanation reads as follows:
“(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons”.
At this point, it is required to note the relevant extracts from Department clarifications titled “Education Guide” dated 20/06/2012 issued in the context of Negative List based taxation of services introduced w.e.f. 01/07/2012 reproduced below:
Para 10.2.2
“Can there be an export between an establishment of a person in taxable territory and another establishment of same person in a non–taxable territory?
No. Even though such persons have been specified as distinct persons under the Explanation to clause (44) of section 65B, the transaction between such establishments have not been recognized as exports under the above stated rule.”
Para 2.4.1
“What is the significance of the phrase “carried out by a person for another”?
The phrase “provided by one person to another” signifies that services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice versa.”
Para 2.4.2
“Are there any exceptions wherein services provided by a person to oneself are taxable?
Yes, two exceptions have been carved out to the general rule that only services provided by a person to another are taxable. These exceptions, contained in Explanation 2 (read as ‘3’) of clause (44) of section 65B, are :
- “An establishment of a person located in tax-able territory and another establishment of such person located in non-taxable territory are treated as establishments of distinct persons.” [Similar provision exists in section 66A(2). The said section is effective till 30/06/2012].
- “An unincorporated association or body of persons and members thereof are also treated as distinct persons.” [Also exists presently in part as explanation to section 65].
Implications of these classificatory remarks are that inter se provision of services between such per-sons, deemed to be separate persons, are likely to be taxed by the department. For example, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multinational company located outside India would be treated as taxable provided other conditions relating to taxability of service are satisfied.
The term ‘establishment’ has not been defined under FA12/POP Rules/ST Rules. However, in this regard useful reference can be made to, “Education Guide” dated 20/06/2012 available on www. cbec.gov.in
In the line with the legislative intent, whereby services availed from an establishment based outside India by another establishment of the same legal entity in India are deemed to be taxed under reverse charge (as per Education Guide at least), it is being provided that in a reverse case scenario the benefit of export would be denied in such cases even if all the other conditions of Rule 6A of ST Rules are satisfied.
Despite the deeming fiction, which was introduced u/s 66A of the Act (in force upto 30/06/2012) and has been continued w.e.f. 01/07/2012 [section 65B(44) – Explanation 2], whether transactions between two establishments within one legal entity can be taxed at all under service tax, remains an unresolved legal issue which would have to be judicially tested.
Implications in case of delays in realisation of export proceeds
An important practical issue that would arise in such cases is, what would happen in cases where there is a delay in realisation of proceeds for “exported services” and application for extension has been made before RBI, and the case comes up for scrutiny/inquiry by the service tax authorities?
Similar issues did arise under income tax, wherein there was a procedure which prescribed for an application to be made to the Commissioner for seeking extension of time in cases of delays in realization of export proceeds. It was commonly found that applications were not disposed off/ nor proceeds realised till the time of completion of assessment. In many cases, assessing officers disallowed deduction claimed u/s 80HHC (subject to rectification) and raised demands which had to be appealed against.
It is felt that, similar situations may arise under service tax as well, whereby subject to discussions in paras hereafter, service tax authorities may raise protective demands with interest which would have to be contested by service providers. It would be advisable for the service providers to make appropriate disclosures in service tax returns.
Implications in cases where proceeds for exported services are not realised either fully or partially.
As stated earlier, non–realisation of proceeds for exported services, may trigger liability to service tax with interest from the point of completion of service in terms of POT Rules.
Further, it needs to be expressly also noted that, POT Rules do not have any provisions for abatements of service tax in case of bad debts (either fully or partially). Hence, this could cast an additional burden on the “exported services” provider, in addition to the loss on account of bad debt.
Implications under CENVAT Rules/ST Rules in cases of non–realisation of proceeds for exported services
a) It has been a settled position in the context of duty drawback under the Customs law, that in case of non–realisation of export proceeds, drawback benefits received by an exporter are required to be paid back to the Government with appropriate interest.
b) On the lines of duty draw back rules, it would appear that, refunds availed by an “exported services” provider under Rule 5 of CENVAT Rules/Notifications issued in terms of Rule 6A of ST Rules would have to be paid back to the Government with appropriate interest.
c) On a combined reading of Rule 2(e) & Rule 6(8) of CENVAT Rules, it prima facie appears that, in cases where proceeds are not realised for “exported services”, the said services could be treated as “exempted services” with consequent implications.
This appears to be inconsistent considering the fact that, in cases where proceeds for exported services are not realised as prescribed in Rule 6A of ST Rules, export benefit would be denied and service tax liability may arise. Hence, if appropriate service tax liability has been discharged by an “exported services” provider, there should not be any adverse implications in terms of CENVAT Rules.
POP Rules v. ST Rules:
POP Rules were introduced w.e.f. 01/07/2012 in terms of the powers granted u/s 66C of FA 12 to determine the place where services are provided/ agreed to be provided or deemed to have been provided/agreed to be provided. This is essentially done to determine the taxability of cross border transactions. In addition to the said POP Rules, Rule 6A as discussed above in detail is introduced under ST Rules w.e.f. 01/07/2012, specifying conditions for determination of ‘export’ service. The said Rule 6A has not been made subject to POP Rules. Further, the clarification of the Government dated 20/06/2012 (para10.21 of Education Guide), clearly states that all the conditions under the said Rule 6A should be satisfied for a service to be treated as ‘exported’ service. On this backdrop, an important issue that arises for consideration is what would happen in cases where all the conditions specified in Rule 6A are not satisfied (for example, realisation in convertible foreign exchange) but the transaction is outside the taxable territory as per POP Rules.
According to one school of thought, such transaction would be regarded as non-taxable and therefore for the purpose of CENVAT Rules, the same would be treated as “exempted service” and hence the benefit of credits/refunds would be denied. The amendments in CENVAT Rules w.e.f. 01/07/2012 seem to support this line of thinking. According to an alternative school of thought, non-compliance of any of the conditions specified in Rule 6A of ST Rules could trigger service tax liability from the date of completion of service as per POP Rules with interest. This would result in apparent inconsistency vis-à-vis amendments in CENVAT Rules w.e.f. 01/07/2012.
To conclude, it appears that it is a contentious issue which needs to be speedily addressed/clarified to avoid litigation in this regard.
