An important Larger Bench decision : Services provided by service providers from outside India :
Hindustan Zinc Ltd. v. CCE, Jaipur 2008 TIOL 1149 CESTAT
Del. LB [2008 (11) STR 338 (Tri.-LB)]
1. Background :
1.1 The law relating to Service Tax is contained in Chapter V
of the Finance Act, 1994 (The Act) as amended from time to time. Service Tax
Rules, 1944 (The Rules) contain machinery provisions in terms of the Act. S. 68
of the Act deals with payment of Service Tax i.e., who shall pay the tax
and the manner. For easy reference S. 68 is reproduced below :
S. 68 :
“(1) Every person providing taxable service to any
person shall pay Service Tax at the rate specified in S. 66 in such manner and
within such period as may be prescribed.
(2) Notwithstanding anything contained in Ss.(1), in
respect of any taxable service notified by the Central Government in the
Official Gazette, the Service Tax thereon shall be paid by such person and in
such manner as may be prescribed at the rate specified in S. 66 and all the
provisions of this Chapter shall apply to such person as if he is the person
liable for paying the Service Tax in relation to such service.”
1.2 Thus the general rule is that person providing taxable
service is the person liable to pay Service Tax. However, U/ss.(2) of S. 68, a
clause is contained which provides that in case of ‘notified’ taxable services,
any other person as may be prescribed is liable to pay Service Tax.
1.3 In the year 2002, a new sub-clause (iv) was inserted in
Rule 2(1)(d) of the Rules with effect from 16-8-2002 (vide Notification
12/2002-ST) which reads as under :
“Rule
2(1)
(d) Person liable for paying Service Tax means —
(iv) in relation to any taxable service provided by a
person who is non-resident or is from outside India and does not have any
office in India, the person receiving taxable service in India”.
1.4 Later i.e., on December 12, 2004, the Government
issued Notification No. 36/2004-ST to come into effect from January 01, 2005
wherein persons other than service providers were specifically notified
u/s.68(2) of the Act. This inter alia also included taxable service
provided by non-resident or person from outside India and who did not have an
office in India.
1.5 Thus, the dispute related to whether the liability to pay
Service Tax could be fastened on the recipient of taxable service from January
01, 2005, the date of issue of Notification No. 36/2005-ST or August 16, 2002,
the date from which Rule 2(1)(d)(iv) was prescribed.
2. In the above background, a single member Bench of Delhi
Tribunal in the case of Aditya Cement v. CCE, 2007 (7) STR 153 in the
context of Rule 2(1)(d)(iv) observed that :
“It is well-settled law that the rules are
subservient to the Sections and if Sections do not provide for discharge of
tax by the recipient of services from non-resident having no office,
then it would be futile exercise to rely upon the rules to collect the tax”
(emphasis supplied). It also stated as follows :
“If the contention of the learned SDR is to be accepted,
then there was no necessity for the Government to issue Notification No.
36/2004-S.T. notifying the service receiver from non-resident having no
office, to pay Service Tax, as receiver. By issuing the said Notification, the
Central Government intended to tax the service receiver from non-resident,
with effect from 1-1-2005, which, in corollary would be that no Service Tax is
payable by this category prior to 1-1-2005.”
The above decision was followed by a Division Bench in case
of Ispat Industries Ltd. v. CCE, 2007 (8) STR 282 (Mum). Doubting the
correctness of these decisions in case of Samcor Glass Ltd. v. CCE, Jaipur-1
Delhi 2007 TIOL 935 CESTAT Del while hearing the stay application the Bench
observed as follows :
“Thus, the person receiving the service from abroad was by
the said clause 2(d)(iv), made liable to pay Service Tax in respect of taxable
services received. This clause is clearly relatable to the provisions of S.
68(2) which contemplates making of such provision under the rules, as is clear
from the word ‘prescribed’ which means ‘prescribed under the rule’. The
statutory effort so created cannot be reduced to a subsequently issued
notification repeating the contents of clause (iv) under sub-heading (B).
The learned Single Member has however taken a different view, while the
Division Bench has not taken into consideration the provisions of Rule
2(d)(iv) of the Rules . . . . . . We do not want to pre-empt the course of
referring the matter to the Larger Bench that may be adopted by the Bench
hearing this appeal” (emphasis supplied).
It however further observed :
“The expression ‘taxable service’ occurring in clause (iv)
of Rule 2(d) is to be understood in the concept of taxable service which are
enumerated in S. 65(105) of the Act and therefore, this Rule will apply to all
taxable services. Prima facie, there was no need to make any further
Notification to repeat what was already prescribed by the said Rule.”
3. The Larger Bench, in misc. order No. CT/85/08 analysed S.
68(2) as follows :
3.1 S. 68(2) according to the Larger Bench could be broadly
divided into two parts :
- The first part envisages specifying ‘services’ in relation to which a person other than service provider is to be made liable. Accordingly, these services have to be identified and specified and this could be done by way of issuing notification.
- The second part envisages specifying the person liable to pay service on such service notified as per the first part. This is done by the Rules already prescribed.
According to the Bench, it was not an acceptable contention that the manner of collection of tax could be extended to include the person liable to pay the tax. It observed:
“The person liable to pay is an integral component of any tax – as a concept distinct from the mechanism for its collection and recovery.”
3.2 Thus, combined reading of Notification 12/2002 notifying Rule 2(1)(d)(iv) and Notification 36/2004 notifying various persons other than service providers including non-residents or persons from outside India liable for Service Tax, would be necessary as both the notifications complemented or supplemented each other and in the absence of either, Service Tax could not be collected or received in respect of specified services. It is required to note that the levy is on rendering of taxable service and not on a person. No sooner than the taxable event takes place, tax must be collected and therefore provision has to be made to fasten the liability to pay Service Tax.
The Bench stated that the first part of the requirement of S. 68(2) had to be carried out by way of notification and the latter could be implemented by making rules. It also stated:
“It is well known that where the law provides the manner for doing something, it should be done in that manner or not at all”.
3.3 In the context of Rule 2(1)(d), it observed “sub-clause (d) of Rule 2 is the definition clause of the Service Tax Rules. The definition clause cannot be read as a substantive provision creating liability much less in a tax statute.”
Referring to Notification No. 36/2006-ST, it observed, “the service specified in Part B was omni-bus, namely, ‘any taxable service’, meaning thereby all types of taxable services provided by a person who is a non-resident or from outside India and does not have any office in India, the recipient became liable for paying Service Tax.”
The Bench also opined that in case of services provided from abroad, the service provider could not be made liable to pay Service Tax and brought un-der the tax net in absence of apparent mechanism for collection and recovery of tax from them. A different provision had to be made.
3.4 The appellant relying on Laghu Udyog Bharti v. UOI, 1999 (112)ELT 365 (SC) argued that provisions of Rule 2(d)(xii) and (xvii) of the Rules were struck down on the ground that the scheme of the Finance Act created charge on the person collecting service tax, whereas Rule 2(d)(xii) and (xvii) treated customers as the assessees, This clearly was in conflict with S. 65 and S. 66 of the Act. The Revenue on the other hand relied on the decision in the case of Gujarat Ambuja Cements Ltd. v. UOI, 2005 (182) ELT 33 (SC) and argued that amendments made with retrospective effect in this regard were upheld and therefore it could not be relied upon. The Bench observed that the Rule 2(1)(d)(xii) and (xvii) were held illegal in Laghu Udyog Bharti’s case (supra) because of charging provisions provided otherwise. When charging Section itself was amended to make the Act and the Rules compatible, criticism of the earlier law upheld by the Court cannot be availed of and that the Legislature was competent to remove infirmities and validate what was declared invalid. However, there was no question of the Finance Act, 2000 overruling the decision of the Court in Laghu Udyog Bharti as the law itself was amended.
3.5 The Revenue also referred to the explanation inserted at the end of Ss.(105) of S. 65 with effect from 16-6-2005. The Bench stated that explanation was a temporary measure to tax imports of services and was subsequently replaced by S. 66A. However, in the opinion of the Bench, the issue involved in the case had no relevance with the explanation.
There being no dispute as to the service involved viz. the consulting engineer’s service as taxable service, any reference to the erstwhile explanation in S. 65(105) was held as misplaced by the Bench.
3.6 In summation, it was held that recipient of taxable service could be held as liable for paying Service Tax only from 1-1-2005 and express concurrence to the decisions in the cases of Aditya Cement and Ispat Industries (supra) was also made.
