The Central Board of Excise & Customs (“CBEC”)
has finally vide its circular1
dated 24th February 2009 (“Circular”)
brought about clarity to the long standing controversy on
instances when a service would be considered as an exported
service.
Flash Back
The Export of Services Rules 2005 (“Rules”)
sets out the conditions for different services to be treated as
an exported service and thereby exempting the service from
service tax in India.
The Export of Services Rule, 2005 categorizes the services into
three broad categories:
Category I covers services that are related to
immovable property, such architect services, general insurance
services, construction services etc. A service will be said to
be exported under this category if is provided in relation to an
immovable property situated outside India.
Category II covers all the services where the place of
performance of service can be established, such as research
agency services, survey and exploration of mineral services,
storage and warehousing etc. A service will be said to be
exported if the services are partly performed outside India.
Category III is a residuary category which covers all
the services which do not fall under Category I or II, such as
business auxiliary services, management consultancy services,
consulting engineer services, banking and other financial
services etc. A service will be said to be exported under this
category if the recipient of such service is located outside
India.
In addition to the above conditions, the Rules also provide that
the services have to be “provided from India and used
outside India” to be considered to have been exported. A
lot of debate and confusion has arisen on the interpretation of
the term “used outside India” and the CBEC has
addressed the same by way of this Circular.
Circular
The CBEC has applied the well established rule of harmonious
construction in its Circular. The term ‘used outside India’ has
been harmoniously interpreted in the context of the
characteristics of each category of service mentioned above. To
clearly bring out the meaning the CBEC has given illustrations
for each of the categories mentioned above.
Category I
An Indian architect prepares a design sitting in India for a
property located in U.K.
The CBEC has clarified that even if a design is prepared by an
architect sitting in India for a property located in UK, it
would have to be presumed that the service has been used outside
India. Thus such a service shall not be taxable in India as it
would be categorized as an Export of Service
Category II
An Indian event manager arranges a seminar in U.K for an Indian
company.
The CBEC clarified that these services will also be treated to
have been used outside India, thereby characterizing it as
export of services and not be liable to service tax in India.
The rationale behind the said is that the place of performance
is in U.K, even though the benefit of such a seminar may flow
back to the employees serving the company in India.
Category III
Indian agents undertake marketing in India of goods of a foreign
seller. In this case the agent undertakes all activities within
India.
For this category the CBEC clarified that the relevant factor to
determine whether a service is an export of service is the
location of the service receiver and not the place of
performance. In this context, the phrase ‘used outside India’ is
to be interpreted to mean that the benefit of the service should
accrue outside India. Thus, for this category it may be possible
that export of service may take place even when all the relevant
activities take place in India so long as the benefits of these
services accrue outside India. Therefore the service mentioned
in the aforesaid illustration, in spite of being performed in
India will be considered to be an exported service as the
benefit of the same accrues outside India.
Conclusion:
While the above Circular lays down only a few example, the
principal laid down by CBEC will go a long way in clarifying the
ambiguities that were prevailing in characterization of service
as an exported service. In fact CBEC has very clearly stated
that in all the illustrations mentioned in the opening paragraph
of the Circular, what is accruing outside India is the benefit
in terms of promotion of business of a foreign company. Similar
would be the treatment for other Category III [Rule 3(1)(iii)]
services as well. Thus, the phrase ‘used outside India’ is to be
interpreted to mean that the benefit of the service should
accrue outside India, and it is possible that export of service
may take place even when all the relevant activities take place
in India so long as the benefits of these services accrue
outside India. This interpretation will definitely bring relief
in many cases, especially in cases of fund advisors present in
India which provide a lot of services such as monitoring of
investments in India, the ultimate benefit of which would accrue
outside India, and hence such services should be considered to
be exported outside India.
The provisions of the above Circular combined with the recent
reduction in the base service tax rate from 12% to 10% will
definitely bring about a lot of relief for service exporters,
including fund managers seeking services from fund advisors
located in India.
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1. Circular No:111/05/2009-ST
