Service Tax on
International Transactions
Nishant Shah
Economic Laws Practice
Advocates & Solicitors
April 9, 2006
Indirect Tax Cost in India
Manufacturer
Wholesaler
Octroi – 4.5%
Interstate purchase
(CST)
Imports
Customs Duty
Basic – 12.5%
CVD – 16%
Ed. Cess – 2%
Sp.CVD – 4%
Local purchase
VAT – 4%/12.5%
Retailer
Local purchase
VAT – 4%/12.5%
Dealer
Retailer

Factory
Intra-State
Ex. Duty – 16%
Edu. Cess – 2%
VAT/ST – 4%
Service Provider
Serv. Tax – 12.24%
Goods Transporter
Serv. Tax-12.24%
Other
Service Provider
Serv. Tax – 12.24%
Other
Service Provider
Serv. Tax – 12.24%

Stock transfer
(No tax)
Toll Manufacturer
Inter-State
Ex. Duty – 16%
Edu. Cess – 2%
CST – 4%
Cumulative burden of Indirect Taxes in
India – 28% to 44% (approx.)
Cenvat Credit – Present Status
MODVAT Scheme
(1986)
CENVAT Scheme
(2001)
CENVAT Scheme
(2004)
Excise Duty paid on
specified
Inputs/Capital Goods
Excise Duty paid on
Inputs/Capital Goods
Excise Duty on
Inputs/Capital Goods
and Service Tax on
Input Services
Credit
Excise Duty on Final
Products
Credit
Excise Duty on Final
Products
Credit
Excise Duty on Final
Products and/or
Service Tax on Output
Services
Proposed Structure in India
GLOBAL SCENARIO
All Indirect Taxes
VAT / GST
State Sales Tax and
Entry Tax
VAT
INDIA – Phase 1
INDIA – Phase 2
Phase 1 + Service Tax +
Reduction in Rate of CST
VAT
INDIA – Phase 3
Phase 2 + Abolition of
CST + All Indirect Taxes
except Customs Duty
VAT
Proposals As introduced by
Finance Bill, 2006
- New Services
- Expansion of Scope
- Key Legislative Changes
Service Tax – Net Widened …
Number of Services
120
100
96
81
80
71
60
58
49
40
40
24
20
0
4
'94
6
'96
26
13
'97
'98
'00
'01
'02
Year
15 New Services Introduced
'03
'04
'05
06
… Service Tax – Net Widened …
 15 New Services Introduced
 Registrar
 Share
to an Issue
Transfer Agent
 Automated
Teller Machine
operations, maintenance or
management
 Recovery
agents
 Sale
of space or time for
advertisement service
 Sponsorship
 Passenger
service
service
air transport
 Transport
of goods in
containers by rail
 Business
support services
 Auctioneers’
 Public
 Ship
service
relations service
management service
 Internet
telephony service
 Transport
 Credit
by cruise ship
card, debit card,
charge card or other
payment cards related
service
… Service Tax – Net Widened
 New Services

Registrar to an Issue

Share Transfer Agent



Automated Teller Machine
operations, maintenance or
management

Business support services

Auctioneers’ service

Public relations service

Ship management service

Internet telephony service

Transport by cruise ship

Credit card, debit card, charge
Recovery agents
Sale of space or time for
advertisement service

Sponsorship service

Passenger air transport service
card or other payment cards

Transport of goods in
containers by rail
related service
Business Support Services …
 Support Services of Business or Commerce means services provided in
relation to business or commerce
 and includes

evaluation of prospective customers,
 telemarketing,
 processing of purchase orders and fulfillment services,
 information and tracking of delivery schedules,
 managing distribution and logistics,
 customer relationship management services,
 accounting and processing of transactions,
 operational assistance for marketing,
 formulation of customer service and
 pricing policies, infrastructural support services and other transaction
processing
Explanation - For the purposes of this clause, the expression “infrastructural
support services” includes providing office along with office utilities, lounge,
reception with competent personnel to handle messages, secretarial
services, internet and telecom facilities, pantry and security
Scope of the term “means … and includes”
 In Bombay Woollen Mills Pvt. Ltd and Another Vs. Union of
India and Others 1988 (36) E.L.T. 35 (Bom.) it was observed
as follows:
“Under the well-known rules of interpretation of statues,
whenever legislature uses the words “means” and “includes”, it
necessarily means that what is included after the word
“includes” does not normally from part of what is expressed by
the word “means”. What is introduced by the second half of the
definition clause by adding the word “includes” is normally not a
part of the first part. So taking resort to the first part of the
definition is wholly irrelevant.
… Business Support Services …
 TRU Letter -
“Business entities outsource a number of services for use in business
or commerce. These services include transaction processing, routine
administration or accountancy, customer relationship management and
tele-marketing. There are also business entities which provide
infrastructural support such as providing instant offices along with
secretarial assistance known as “Business Centre Services”. It is
proposed to tax all such outsourced services. If these services are
provided on behalf of a person, they are already taxed under Business
Auxiliary Service. Definition of support services of business or commerce
gives indicative list of outsourced services”
 Business Auxiliary service means service in relation to -
(i)…(vi)
(vii) A service incidental or auxiliary to any activity specified
in sub-clauses (i) to (vi), such as …
… Business Support Services
 Taxable service in relation to
 Business Support Services – means any service provided or to
be provided to any person, by any other person, in relation to
support services of business or commerce, in any manner
 Business Auxiliary
Service - means any service provided or to
be provided to a client, by any person (commercial concern) in
relation to business auxiliary service
 Management
Consultant’s service - means any service
provided or to be provided to a client by a Management
Consultant in connection with the management of any
organisation, in any manner
Sale of space or time for Advertisement…
 Taxable service means any service provided or to be provided to any
person, by any other person, in relation to sale of space or time for
advertisement, in any manner; but does not include sale of space for
advertisement in print media and sale of time slots by a broadcasting
agency or organisation.

Explanation 1.—For the purposes of this sub-clause, “sale of space or time
for advertisement” includes,—

providing space or time, as the case may be, for display, advertising, showcasing of
any product or service in video programmes, television programmes or motion
pictures or music albums, or on billboards, public places, buildings, conveyances,
cell phones, automated teller machines, internet;

selling of time slots on radio or television by a person, other than a broadcasting
agency or organisation; and

aerial advertising
…Sale of space or time for Advertisement
 Explanation
2.—For the purposes of this sub-clause, “print media”
means “book” and “newspaper” as defined in sub-section (1) of
section 1 of the Press and Registration of Books Act, 1867; 65
(105) (zzzm)
 Advance Authority Ruling in Google’s case has held that
sale of space in internet for advertisement is covered under
Advertisement Services
 Internet
entry
advertisement is now specifically covered under new
Sponsorship services
 Taxable service means
“any service provided or to be provided to any body corporate or
firm, by any person receiving sponsorship, in relation to such
sponsorship, in any manner, but does not include services in
relation to sponsorship of sports events”
 Body corporates or firms involved in business or commerce
sponsor events with an intent to obtain commercial benefit
or bringing their name or products or services to public
attention by associating with a popular or successful event.
 Proposal is to collect Service Tax under reverse charge
method from the recipient of service (the Corporate Firm
sponsoring the event)

Likely amendment in the Rules along with notification of Service
… Service Tax – Net Widened …
 Banking and Financial Services
 Bankers to an issue, telegraphic / mail / electronic Transfer of
money
 Business Auxiliary Service
 Maintenance of computer software & computerized data
processing is no longer IT Services
 Consulting Engineers Services
 Services rendered by a body corporate made taxable
 Erection, Commissioning & Installation Service
 Definition amended to include Structures / pre fabricated
structures
… Service Tax – Net Widened
 Maintenance and Repair Service
 Scope enlarged to include operational services in relation to
movable properties
 Technical Testing and Analysis Services
 Proposed to clarify that above service includes Clinical testing
of drugs and formulations services
Key Legislative Changes
 Rate of Service Tax from 10% to 12%
 Scope of Advance Ruling enlarged
 To empower Authority to determine liability to pay Service Tax
 Section 67 substituted
 Where consideration for the taxable services is in terms of
money, then the “gross amount charged”
 Where
the consideration for the taxable services is not wholly or
partly consisting of money, then “be such amount in money, with
the addition of Service Tax charged is equivalent to the
consideration”.
 Where
the consideration is not ascertainable, then the value
would be determined as per prescribed manner
 Draft
Valuation Rules Issued
- Export of Services
- Export of Goods
- Import of Services
- Export of Services
Four Modes of Supply of Service under GATS

GATS recognizes 4 modes of delivery of Services:
Mode 1-Cross border supply, e.g. supply of diskettes,
architects blueprints, etc.

Mode 2-Consumption abroad, e.g. a tourist availing of
Services abroad

Mode 3-Commercial presence, e.g. form of legal entity
established abroad like a bank branch

Mode 4-Movement of Natural Persons, e.g. physical
movement of professionals, skilled and unskilled labour for
temporary period. It does not cover permanent migration
Export of Service under FTP
 "Services" include all the tradable services covered under
General Agreement on Trade in Services and earning free
foreign exchange.
 "Service Provider" means a person providing
 Supply of a ‘service’ from India to any other country;
 Supply of a ‘service’ from India to the service consumer of any
other country in India; and
 Supply of a ‘service’ from India through commercial or physical
presence in the territory of any other country
 Supply of a ‘service’ in India relating to exports paid in free
foreign exchange or in Indian Rupees which are otherwise
considered as having being paid for in free foreign exchange
by RBI
Export of Services …
 Position from 9.4.1999 to 28.2.2003
 Notification No. 6/99 dt. 9.4.1999
 Payments
received in India in convertible foreign exchange were
fully exempt
 From 1.3.2003
 Circular No. ST-56/5/2003, dt. 24.4.2003 clarified that  Service
tax is destination based consumption tax and it is not
applicable on export of service
 Condition to receive payments in foreign exchange withdrawn
 From 20.11.2003
 Notification No. 21/2003
 Condition
to receive payments in foreign exchange revived as was
under Notification No. 6/99 dt.9.4.99
… Export of Services ....
From 15.3.2005
 Export of Services Rules, 2005 notified (Notification 9/2005)
 Effective
from March 15, 2005
 Notification
21/2003 providing exemption to foreign exchange
receipt has been rescinded vide Notification No. 10/2005
 No
service tax required to be paid on export of services
 Rebate
3
may be granted by way of Notification
categories of services specified
 Category
I : 9 services
 Category II : 50 Services
 Category III : Balance Services not specified in Categories I and II
... Export of Services …
Category I
 Rule 3(1) Services in relation to immovable property situated
outside India
 Specific
conditions
Such services must have been provided in relation to an immovable
property situated outside India
Category II
 Rule 3(2) Services performed partly in India and partly outside
India deemed to be provided outside India
 Specific
conditions
Services must have been performed, either fully or partly, outside
India
... Export of Services …
 Common conditions for Categories I and II
 Such
service is delivered outside India and used in business or for
any other purpose outside India
 Payment for such service provided is received by the service
provider in convertible foreign exchange
 Category III
 Rule
3(3) taxable services shall be treated as export if recipient
is located outside India
 Conditions..
… Export of Services …
 Category III 
Condition for export of services  Service
which are provided and used in relation to commerce
and industry and service recipient is situated outside India; or
 If the recipient has any commercial establishment or office in
India then
Such service is delivered outside India
Such services used in business or for any other purpose outside
India
Payment for such service provided is received by the service
provider in convertible foreign exchange
Order for provision of service is received from the office located out
side
 Service
which are provided and used other than in relation to
commerce and industry and the service recipient is located
outside India at the time of receipt of service
… Export of Services …
Category I
Category II
Category III
Architect’s Services
Stock Brokers Services
Advertising Agency’s
Services
Commercial and
Clearing & Forwarding
Industrial Construction Agent's Services
Service
Consulting Engineer’s
Services
Construction of
Complex service
Business Exhibition
Services
Management
Consultant’s Services
Dredging Service
Chartered Accountant's
Services
Business Auxiliary
Services
Interior Decorator
service
Maintenance or Repair
Service
Intellectual property
service
Real Estate Agent
Transport of Goods by
Road / Air Service
Franchise Services
Export Benefits – Input Service Tax
Type of Benefit
For
Eligible under
Rebate
Export of Services
Rule 5 of Export of
Services Rules
Refund
Export of Goods and
Services
Rule 5 of Cenvat Credit
Rules
Duty Drawback
Export of Goods and
Services
Vide Sec93A of the Act
Other Benefits
Export of Goods and
Services
Empowered under Sec
93A of the Act
Rebate on Input Service Tax
 Export of Service Rules exempts services exported
Not Service Tax on input services
 Such Service Tax exempt vide Rule 5 of Export of Services Rules

 Rule 5 of Export of Services Rules, 2005
“Rebate of service tax.- Where any taxable service is exported,

grant rebate of service tax paid on such taxable service or service tax or
duty paid on input services or inputs, as the case may be,
 used in providing such taxable service
 the rebate shall be subject to such conditions or limitations….specified in
the notification”
 Procedure for obtaining such refund set out in:
Notification No. 11/2005 – rebate of tax paid on services exported
 Notification No. 12/2005 – rebate of:


Service tax paid on input services used, or
 Duties paid on goods used
for providing taxable services which are exported
- Export of Goods
Refund of Cenvat Credit on Exports
 Rule 5 –Refund of Cenvat Credit
 Where input or input service is used in
 final
products which is cleared for export under bond or LUT
 Intermediate products cleared for export
 Providing output service which is exported
 Cenvat
credit on above inputs or input services shall be
allowed to be utilized by the manufacturer or service provider
towards payments of
 Excise
duty on final product cleared for home consumption or
export on payment of duty
 Service tax on output service
 If
adjustment not possible than the manufacturer shall be
allowed refund
 No refund shall be granted if drawback availed or rebate
claimed
… Export of Goods & Services
 Refund of unutilized input service credit restricted to the
extent of the ratio of export turnover to the total turnover for
the given period to which the claim relates i.e.
 Maximum
refund = Total CENVAT credit taken on input services
during the given period × export turnover ÷ Total turnover
Rebate of Input Service Tax on Export of Goods
 Section 93A as inserted by Finance Act, 2006
Section 93A enables  Rebate of service tax paid on input services used in the
manufacturing or processing of goods and provision of taxable
services, which are exported
 Enables
the Central Government to prescribe schemes for
neutralization of service tax on input services used in export
goods or services
 Such
rebate subject to receipt of consideration / sale proceeds
within the time allowed by the RBI under section 8 of FEMA
 Consequently,
Section 94 amended to empower Central
Government to frame Rules in this regard
Duty Drawback
 In line with powers acquired vide introduction of Section 93A
 Govt intends to extend Duty Drawback Scheme to Service tax
 Letter issued requesting for information on input Service tax
on export products
 Duty Drawback Rates to be modified to factor in the Service
Tax component
- Import of Services
Import of Services-International Precedent
 New Zealand
System based on the destination principle – Place of supply essential
 Place of supply determined by reference to the residence of the supplier
 In the case of non-resident suppliers, the test is whether the services are
physically performed in New Zealand and, for transactions between
registered persons, whether the parties agree to treat New Zealand as
the place of supply

 European Union
The place of supply determined by reference to the “establishment” of the
supplier
 These rules are based on the principle that the majority of consumption
will occur in the GST or VAT jurisdictions in which the supplier resides
 Some jurisdictions like UK apply a targeted effective use test to certain
types of imported services, such as telecommunications

Import of Services-International Precedent
 Reverse charge Mechanism – OECD Framework
 Most commonly used mechanism for taxing imported services
is the reverse charge
 Reverse charge mechanism consistent with the accepted
OECD framework for consumption taxes, which provides for
taxation of services in the jurisdiction in which the services are
consumed, that is, in the jurisdiction to which they are imported
Import of Services …
 The concept of Non-resident Service Provider introduced in
2002 with the introduction of Rule 2(1)(d)(iv)
 Until introduction of Finance Act, 2005 services provided
beyond the territorial waters of India not liable to Service Tax
 Finance Act, 2005 brought major amendment to Section
65(105) by inserting the ‘Explanation’ from 16.06.2005
 Finance Bill, 2006 proposes to insert new Section 66A to
fortify explanation inserted earlier
… Import of Services …
 Rule 2(1)(d)(iv)
 From 16.08.2002 to 16.06.2005
 in
relation to any taxable service provided by a person who is a
non-resident or is from outside India, does not have any office in
India, the person receiving taxable service in India;
 Post
 in
16.06.2005
relation to any taxable service provided or to be provided by a
person, who has established business or has a fixed
establishment from which the service is provided or to be provided
or has his permanent address or usual place of residence in a
country other than India, and such service provider does not have
any office in India, the person who receives the service and has
his place of business or fixed establishment, permanent address
as the case may be usual place of residence in India
… Import of Services …
 16.6.2005 up to date of enactment of Finance Bill 2006
 Explanation to Section 65 (105)
 Explanation
- For the removal of doubts, it is hereby declared that
where any service provided or to be provided by a person, who
has established a business or has a fixed establishment from
which the service is provided or to be provided, or has his
permanent address or usual place of residence, in a country other
than India and such service is received or to be received by a
person who has his place of business, fixed establishment,
permanent address or, as the case may be, usual place of
residence, in India such service shall be deemed to be taxable
service for the purposes of this clause;
… Import of Services …
 Whether services provided outside India are liable ?
 Levy does not satisfy the requirement of territorial nexus


Sec 64 extends the Act to the whole of India other than the State of
Jammu and Kashmir but not beyond
Judicial precedents under other taxing laws State of Bombay v. R.M.D. Chamarbagwala – 1957 SCR 874
 Haridas Exports v. All India Float Glass Mfr Asso. – 2002 145 ELT 241
(SC)


Issue of territorial constraint recognised by CBEC in its circular dated
8-10-2001

Circular No. 36/4/2001 dated 8.10.2001 clarified that services provided
beyond territorial waters of India not liable to Service Tax
To sustain the levy, rendition of the service must be in India
 CBEC has recognized that the tax is a destination based consumption
tax, therefore, consumption in India is a vital ingredient of the levy
 Levy cannot be sustained if neither rendition nor consumption is in
India

… Vexing Issues
 Explanation being clarificatory in nature – Whether
applicable retrospectively ?
 Recently,
held by the Hon'ble Supreme Court in the case of
Sedco Forex Vs CIT (279 ITR 310)
 “Explanation”
can not have retrospective applicability when
intended to change the scope
 Interim
stay granted for 4 weeks for the operation of
Explanation under Section 65(105) and Rule 2(1)(d)(iv) and
Notification No. 23/2005 S.T. dated 07.06.2005 by Madras High
Court in Tamil Nadu Spinning Mills Association Vs. Union of
India 2006-TIOL-28-HC-MAD-ST
… Import of Services …
 Section 66A Introduced

Services provided by a person who has established a business or
has a fixed establishment or has his permanent address or usual
place of residence outside India to a person who has a place of
business in India are sought to be made liable to Service Tax

The provisions of the new Section will not be applicable to Individuals
receiving the services not for business or commercial purpose

Company receiving services from its overseas branch will have to
pay Service Tax

Even if the services is provided by a person to is own self, Service Tax will
be applicable
 Explanation to Section 65(105) to be omitted

All demands under Explanation 65(105) should stand abated

16.8.2002 to 16.6.2005
 16.6.2005 up to date of enactment of Finance Bill 2006
Import of Services …
Draft Import of Services Rules
 Services provided by a person who has no place of business /
establishment in India, deemed to be received in India in
following situations:
3
Categories of services specified
 Category
 Rule
I
3(1) Services in relation to immovable property situated in
India
 Category
II
 Rule
3(2) Services performed fully or partly in India deemed to be
received in India
 Category
 Rule
III
3(3) taxable services shall be treated as received in India if
recipient is located in India and service is for use in commerce
and industry
… Import of Services
Category I
Category II
Category III
Architect’s Services
Air Travel Agent's
Services
Advertising Agency’s
Services
Commercial and
Clearing & Forwarding
Industrial Construction Agent's Services
Service
Consulting Engineer’s
Services
Construction of
Complex service
Business Exhibition
Services
Management
Consultant’s Services
Dredging Service
Chartered Accountant's
Services
Business Auxiliary
Services
Interior Decorator
service
Maintenance or Repair
Service
Intellectual property
service
Transport of Goods by
Road / Air Service
Franchise Services
… Import of Services …
 Recipient of services liable to pay Service tax
 Rule 4 provides that Cenvat credit cannot be utilized towards
payment for services received from person outside India and
Service tax paid by recipient
Thank You