Author Name:   Ranjani Sivaraman

Deals with the history of Export of service rules and the latest changes in the same...

"The debts, men are least willing to pay the taxes” - - Ralph Waldo Emerson

The concept of taxation of services is of recent origin. The share of services accounts for 60%[1] of the GDP and it is the major driver of economic growth. The Services are taxed under Chapter V of the Finance Act 1994, enforceable by the Central Excise Authorities who are constituted under the Central Excise Act, 1944. The taxes are generally paid by the Service Providers at the rate of 10.30%.More than 100 services are taxable according to the present regieme. The globalization if the Indian markets in 1991 led to the services being exported. Earlier, there was no separate Law or Rules to govern the export of services.However, the government had, for the first time, devised a service export policy in the Export-Import Policy 2002-2007, given the increase in the share of service sector in the national economy over the years.
 
Meaning of the term ‘Export of Services’
The term ‘export of service’ is neither defined in the Finance act nor in the Export of services rules. In International Trade the term ‘export’ is used to mean “selling of services from home country to other markets”. However according to the Export of Service rules, any taxable service shall be treated as export of service “if such service is provided from India and used outside India”[2]. The Delhi tribunal in the case of Microsoft Corpn (i) (P) Ltd. v. CCE, New Delhi[3] has taken the assistance of the Customs Act 1962 to define export to mean “taking out of India to place outside India”. Also, in the case of TNT India Pvt. Ltd. v Comm. Of Service Tax, Bangalore[4], it has been held that “once the goods are taken outside the country export would be deemed to have taken place”. Export in a general sense thus means rendering service outside India. Services are different from goods. The services are intangible and diverse in nature. This nature of services, makes it is very difficult to ascertain when there has been an export of service, unlike in the case of goods which can be said to have been exported the time they cross the border. Hence a need was felt, to have a separate piece of legislation to govern the export of services.
 
Development:
The Export of Service rules owes its origin to GATT. In the early 1970’s, a need was felt to regulate the rules in certain areas like agriculture, services, IPR, etc., across the world. Hence in the 8th round of GATT i.e. the Uruguay Round, negotiations were carried on in the area of Services which led to the General Agreement on Trade in Services (GATS). This agreement recognised four modes of delivery of services:
1.      Cross Border- The service itself crosses the border
2.      Consumption Abroad- The consumer travels across the border
3.      Commercial presence- esatablishment of an office or industry
4.      Movement of Natural Persons- The service su-plier travels across the border.
Having the above principles in mind, by the powers granted under subsection (1) and (2) of Section 94 of the Finance Act the Export of Service Rules, 2005 were formulated which was made effective from 15/3/2005 thorugh a notification No.9/2005-ST dated 3/3/2005.However, before the export of service rules, there were certain other notifications, issued by the government which paved the way for the current rules.
The development of export of service tax rules in India can be divided into six stages.

Stage 1:
According to notification 6/99 S.T. dated 9/4/99; any payment received in India in convertible foreign exchange by a service provider was fully exempt from tax in respect of all taxable services. This notification was subsequently rescinded, which led to the exemption being withdrawn. A representation was made to the government, that the removal of the exemption would cause undue hardship to the exporters and would render their services incompetent in the international market.

Stage 2:
In pursuance of the above representation, a clarification was issued by the department through a circular, that since service tax is a consumption based tax the same is not applicable for export of services, and the previous notification rescing the exemption will not have any appilicability. This clarification was also withdrawn by a circular vide circular No. 93/04/2007 dated 10/05/2007

Stage 3:
The above exemption was brought into force again through the Notification No.21/2003 dated 20/11/2003. This however was only an interim measure and the CBEC made certain proposals which envisaged the trifurcation of taxable services into three categories:
1.      Services physically carried out partly or wholly in India.
2.      Services relateable to immovable property located outside India.
3.      Services in respect of which the recipient of service is located outside India.
The proposal was to treat such services as deemed to have been exported, so that the service tax would not be payable if the proposed criteria or the conditions are satisfied. The proposal also envisaged the grant of refund of input credit, if any, if it could not be utilized for the payment of service tax in India.

Stage 4:
Nothing concerete came out from the proposal and so the exception granted under the Notification No.21/2003 dated 20/11/2003 continued to hold the field till 14/3/2005.

Stage 5:
Notification No. 21/2003 was rescinded w.e.f. 15/3/2005 by Notification No.10/2005 S.T. dated 3/3/2005. Similarly, Notification No. 28/2004 S.T. dated 17/9/2004 granting exemption on the transport of export cargo by air craft was also rescinded from 15/3/2005 by the same notification.

Stage 6:
The Export of Services was notified through a Notification No. 9/2005 S.T. dated 3/3/2005.
 
Reasons for exempting Export of Services
The main intention of the government was “to releive exports of all the domestic taxes and to render exports competitive in the international market.”[5]  Another reason for exempting the export of services from tax is that, it is the goods and services that have to be exported and not the tax itself. Moreover, the objective of the government was to generate foreign exchange by reducing the procedural hassles. Service tax is also a destination based consumption tax[6]. It is leviable only on those services which are rendered in India except the state of Jammu and Kashmir. Thus all those services which are rendered outside India cannot be subject to the service tax. Therefore, if the services provided are consumed abroad, it is covered under export and so not liable to tax. .
 
Applicability of the Rule:
The Export of Service Rules is applicable to whole of India except the state of Jammu and Kashmir.Any service provided within the territorial limits of the state of Jammu and Kashmir is excluded from the purview of Service tax. According to the Export of Service Rules, only taxable services, if exported, are exempted form the purview of Service tax. Hence any export of service taking place from the State of Jammu and Kashmir is not covered by the rules.
 
India:
The definition of the term ‘India’ is of great importance. The Finance Act covers the taxable services provided and the Export of services gives exemption to those taxable services that have been exported.However, neither the Export of Service Rules, 2005 nor the Finance Act, 1994 has explicitly laid down where the services must be provided. On a conjoint reading of S. 64(1), S. 64(3) and S. 66 of the Finance Act 1994, it can be inferred that the act is applicable in ‘India’. There has also been various notifications and circulars issued by the government to clarify the meaning of this term.

A circular[7] was issued on 8/10/2001 which said that India included the territorial waters with in its definition. Another notification was issued which defined India to include the continental shelfs and Exclusive Economic Zones.[8] However certain activities within this zone were excluded. By another notification any activity of construction and operation of installations, structures and vessels for the purpose of extraction in EEZ and continental shelf was also termed as activity in India[9]
.
Categorization of services, Rule 3:
As stated earlier the export of service rules did not define the term Export. However it categorised various services on the basis of their performance into three viz:
1.      Property related services[10] - immovable property is situated outside India
Eg. The interior decorator’s service falls under the first category. Hence if the interior decorator is going to plan any decoration for a property in UK, them the service provided will be an Export of service as the property for which the plan is made is in UK.

2.      Situs of service[11]-service is performed, either fully or partly outside India.
Eg. Market Research Agency Service is one of the services which come under the second category of services. Hence, if X Company appoints Y (market research agency) in India to do a market study, the same will be considered export of service only if atleast a part of it is performed outside India.
Recent Changes: The Chartered Accountancy Service, Cost accountant service and Company secratery service which was in this category, has been shifted to category 3 by the Budget 2010. The reason for the shift might be because as held by the Supreme Court in the case of M/s B.A Research India Ltd. v. CST Ahmedabad[12] the service performed has no value unless they are delivered to the client. The services so shifted also gain their importance from their useage by the client.

3.      Location of the service receiver.[13]- If the taxable service is provided in relation to business or commerce, then such a service must be provided to a recipient located outside India.
                                                        If the taxable service is provided, otherwise than in relation to business or commerce, the service has to be provided to a receipient located outside India, at the time of provision of such service.
 
Eg. If A an Indian uses his debit card in a bank abroad the same will be considered export of service and he will be exempted from paying tax.
Recent Changes: Budget 2010 has shifted the Mandap Keeping service from this category to the category 1 of the export of service rules. The reason for this might be attributed to the fac that this service essentially depends upon the immovble property.
Along with the above, additional conditions were also imposed to qualify as exports
1.      Such service is provided from India[14]
2.      Such a service is used outside India[15]
3.      Payment is received in convertible foreign exchange.[16]- This principle however has been given a linient interpretation by the tribunals by the following cases.
 
            The court in the case of Nipuna Services Ltd. v. Comm.of Cen Ex., Cust &S.T.(A-II) Hyderabad[17], has given a liberal interpretation to this clause, to include the money received by an agent of the service provider in abroad and the remmitance of the same in the Indian currency provided the service receipient does not have any establishment on India and the period of dispute is before 1/3/2007.

             In the case of National Engg. Ind. Ltd. v. CCE, Jaipur[18] , the court adopted a liberal interpretation to define of ‘export’ under the rules. The facts of this case are that the appellant (agent) was in India and he procured the orders for GMC (foreign principal), from Indian Railways in India. He received an amount of comission from Indian Railways for the service rendered in Indian currency. The question in this case was whether the service rendered amounted to export of service. The court held that the service provided amounted to export of service even though the money was received in Indian currency because GMC did not have any commercial establishment in India.

Hence of the above conditions were fulfilled the service would be termed as an Export of Service and according to Section 4 of the Export of service rules the same would be exempted from the payment of tax.
 
Options to the exporter to avail the benefits given under the rules:
The exporter has the following modes of availing the benefits granted under the Rules:
1.      Exemption: (Rule 4)
As stated earlier, the exporter can export his services without the payment of tax.
2.      Rebate/Refund: (Rule 5)
The exporter also has another option apart from claiming exemption. He can pay the tax/duty on the inputs or input services and claim a refund/ rebate of the same.[19]
Two notifications [20]were issued by the government to lay down conditions and to regulate the procedure to be followed while claiming rebate. On a conjoint reading of the two notifications one can find two sets of conditions that need to be fulfilled:
1.      General Conditions
2.      Specific conditions

General Conditions:
Following are the general conditions that have to be fulfilled by the exporter.
1.       Services must be taxable
2.      They must be exported in accordance to Rule 3
3.      Receipt of money in convertible foreign exchnage
4.      The amount of rebate claimed should be more than Rs. 500
5.      The export should be to a country other than Nepal and Bhutan

Specific Conditions:
There are also certain specific conditions laid down by the notifications that have to be fulfiled before claiming rebate/refund. They are:
1.      The amount of Rebate claimed has to be actually paid[21]
2.      Inputs and input services must be used in providing taxable services which is exported
3.      Duty must have been paid
4.      No CENVAT Credit should have been availed by the exporter on the inputs/input services used in the exports.[22]

Future of the Export of services rules:
The existing system of taxation of goods and services is expected to be replaced by the Goods and Service Tax (GST). While the basic priciple that the service tax is a destination based consumption tax has been kept in mind, the exports of services have been zero rated in the GST. This is a laudable step as zero rating of services gives the exporter a benefit of availment of credit on the Inputs used. Other benefits of export like the refund are kept in tact in GST.
 

Conclusion:
The exportof service Rules is a special piece of legislation granting special rights to the exporters. Today in the field of competitive market, care has to be taken by the courts to give a liberal interpretation to the words used in the export of service rules. This would not only reduce the anciousness of the exportes but also would also help to maintain the spirit with which the rule was enacted.

[1] Budget 2010-2011
[2] Rule 3(2)(a)- deleted in the 2010 budget
[3] 2009(15) STR 680
[4] 2007 (7) STR 207
[5] T.R.Rustagi Service Tax in India 2002 edition.
[6] TNT India Pvt. Ltd. v. Comm. Of Service Tax, Bangalore, 2007 (7) STR 207
[7] Circular No. 36/4/2001
[8] Notification No.1/2002 dated 1/3/2002
[9] Notification No.14/2010 ST dated 27/02/10
[10] Rule 3(1)(i)
[11] Rule 3(1)(ii)
[12] 2010 TMI 76132, CESTAT Ahmedabad
[13] Rule 3(1)(iii)
[14] Deleted through Notification No.6/2010-ST dated 27th Feb 2010
[15] Deleted through Notification No.6/2010-ST dated 27th Feb 2010
[16]Rule 3(2)(b) c for case laws
[17] 2009 (14) STR 706 (Bang)
[18] 2009(15)STR 68 (Tri- Del)
[19] Rule 5 of the Expor tof Service Rules 2005.
[20] Notification No. 11/2005 ST dated 19/4/2005 & Notification No. 12/2005 ST dated 19/4/2005
[21] Notification No. 11/2005
[22] Point 2,3,4- Notification No. 12/2005

The  author can be reached at: ranjani.sivaraman@legalserviceindia.com

ISBN No: 978-81-928510-1-3
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