The Hindu Business Line : Hopes of wind in sails of shipping cos

Shipping companies have been protesting against the sudden demands for service tax. The latest provocation for the industry is the slew of notices issued by the DG-CEI (Director-General of Central Excise Intelligence).

To compound the woes of assessees, the tax demand is retrospective, for the period from August 2002 to March 2006, in respect of services received and consumed outside India.

"The proposed action clearly appears to be motivated by the recent deletion of Section 65(105) Explanation and the introduction of new Section 66A relating to the scheme of taxation of imported service with effect from April 19, 2006," says Mr B. Sriram of Ernst & Young, Chennai. "Simultaneously, the applicable Service Tax Rule, namely Rule 2(1)(d)(iv), was also amended."

Sub-section (105) of Section 65 of the Finance Act, 1994 defines `taxable service'. The `Explanation' at the end of the long list in that sub-Section used to read: "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; and the term `service provider' shall construed accordingly."

Under the erstwhile Explanation, interpretations were made so as to levy tax on service received in any part of the world so long as the service provider and service recipient satisfied their status tests, explains Mr Sriram.

These tests, couched in the Explanation above, were: (a) Service provider meant a person who has established a business or has a fixed establishment from where such service is provided, or has his permanent address or usual place of residence in a country other than India, and who does not have any office in India; and (b) service recipient meant any person who has his place of business, fixed establishment, permanent address or usual place of residence in India.

"This interpretation led to extra-territorial application of service tax laws, and tax was levied on services provided and received outside India," he points out.

"After the introduction of the new Section 66A, the Department has given up such an argument."

Section 66A, titled `Charge of service tax on services received from outside India', provides for recovering service tax on such services "from the recipient of services in India, under reverse charge method," according to a release on www.cbec.gov.in.

Under the new law, even two permanent establishments - one located in India and the other outside India - are treated as two different entities.

"A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country," reads Explanation 1 to Section 66A.

Thus, a foreign branch office of an Indian company receiving service outside India cannot be treated as service received in India and be taxed any more.

But why is tax being demanded from August 2002? "Because Rule 2(1)(d)(iv) was introduced from then," says Mr Sriram.

However, he is sceptical about the soundness of the taxman's move.

"Considering that Section 65(105) Explanation is under challenge in some cases and also that the provision was not happily worded, the proceeding against the shipping companies in the instant case or any such proceedings in this regard would be highly litigious, with the assesses having sound arguments to defend."

While that should keep the wind in the sails of the shipping companies, there is homework to do in the Department. For, he says, it is high time that elementary concepts of service tax, such as the words `provided', `performed' and `rendered', get clarified to avoid ambiguities and multiple disputes.