Section 66A — Import of services — Constitutional validity upheld — Charge of service tax created on services provided from outside India by a person having a business establishment/fixed establishment from which the services are provided and received in India by a person who has a place of business, fixed establishment, permanent address or usual place of residence in India and the Rules in respect thereof made under powers conferred by sections 93 and 44 r.w.s. 66A of the Finance Act, 1994 ar<

Section 66A — Import of services — Constitutional validity upheld — Charge of service tax created on services provided from outside India by a person having a business establishment/fixed establishment from which the services are provided and received in India by a person who has a place of business, fixed establishment, permanent address or usual place of residence in India and the Rules in respect thereof made under powers conferred by sections 93 and 44 r.w.s. 66A of the Finance Act, 1994 are not unconstitutional on both grounds; legislative competence and/or extra-territorial operation of laws.

The petitioner, a software manufacturer and 100% exporter had an agreement with a US company whereby the US company would promote petitioner’s business activity in US. Service tax was demanded on the amount paid to the US company for the period 2008-09. The petitioner challenged the levy on the said US company’s services viz. AMC charges for upgradation of software and online support services. The grounds of the challenge were (a) constitutional validity of section 66A and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (Import Rules) (b) extra-territorial jurisdiction of the levy based on the scope of section 64 of the Act which provides that the Act will extend to whole of India except State of Jammu & Kashmir. The petitioner contended that section 66A and the Import Rules create another taxable event/ incidence of tax from services provided to services received in India and which was against the legislative scheme. While challenging constitutional validity the petitioner in the context of Entry 92C of the Union list contended that services rendered in India which would form part of GDP were sought to be taxed as they significantly contributed to GDP. However, levying service tax on services rendered outside India being not part of GDP would be unconstitutional. The petitioner also contended that unlike the Income-tax Act, there did not exist double taxation treaty in service tax and therefore hardship in the form of multiple taxation on the same activity would be caused. They placed reliance upon All India Federation of Tax Practitioners v. Union of India, (2007) 7 STR 625 (SC). Discussing various parts of the said decision, it was contended that service tax is a VAT which in turn is both a general tax and destination-based consumption tax leviable on services provided within the country. Further reliance was placed on various decisions, including on Ishikawajma Harima Heavy Industries (2007) 3 SCC 481. The Revenue, on the other hand, contended that 66A was a valid provision and did not suffer from the vice of unconstitutionality and inter alia relied on Tamil Nadu Kalyan Mandapam Association v. UOI, (2004) TIOL 36 SC-ST (wherein constitutional validity of section defining Mandap Keeper’s service was upheld) and All India Federation of Tax Practitioners (supra) (wherein legislative competence of Parliament to levy service tax on chartered accountants, cost accountants and architects was upheld). Among other decisions, Indian National Shipowners Association v. UOI, (2009) 13 STR 235 (Bom.) was also referred to and noted.

Held:

Constitutional validity of the competence of Parliament to levy service tax has been upheld by the Supreme Court in Tamil Nadu Kalyan Mandapam Association (supra), All India Federation of Tax Practitioners (supra) and Association of Leasing and Financial Service Companies (2016) TIOL 87 SC-ST-LB. In the case under examination, the concern was for objection to the legislative powers of the Parliament on its extra-territorial operations, namely, the charge in respect of taxable events/ incidence of service tax on services provided outside India. Citing excerpts from the decisions such as Shrikant Bhalchandra Karulkar v. State of Gujarat, (1994) 5 SCC 459, State of Bihar & Ors. v. Shankar Wire Products Industries & Ors., (1995) Supp. 4 SCC 646 and GVK Industries Ltd. v. Income-tax Officer & Anr., (2011) 4 SCC 36, the High Court held:

As held in GVK Industries Ltd.’s case, Parliament does not have power to legislate for any territory other than territory of India or part of it and such laws would be ultra vires. It follows therefore that Parliament is empowered to make laws with respect to aspects or cause that occur, arise or exist or may be expected to do so within the territory of India and with respect to extra-territorial aspects or cause that have an impact on or nexus with India. Citing various terms in the agreement of the petitioner with the US company, it was concluded, “we find that taxable services provided from outside India are received and can be taxed in India u/s.66A(1)(b) of the Act.” Further that Import Rules made in exercise of powers conferred by sections 93 and 94 r.w.s. 66A of the Finance Act, 1994 do not suffer from the vice of constitutionality either on the ground of lack of legislative competence or on the ground of extra-territorial operation of laws.