SINCE its inception in 2005, Export of Service Rules (Hereinafter ‘Rules') have been a trouble maker to the exporter of services with the department exploiting the loopholes in the Rules. Its matter of rejoice for the exporters that Budget 2010 proposes to simplify the Export of Service Rules.
Amendments to Export of Service Rules
When introduced in March 2005, the conditions prescribed by Export of Service Rules to qualify as exports were- service should be in relation to an immovable property located outside India; or the service should be performed fully or partly outside India; or the service recipient should be located outside India .
In April 2006, Export of Service Rules was amended to include an additional condition to qualify as an export- ‘the service should be delivered and used outside India'.
In March 2007, with an intention to simplify the Rules, a further amendment was made to the Rules by replacing ‘delivered and used outside India' with service provided from India and used outside India'.
The current scenario
Sub rule 2 of Rule 3 of the Rules prescribes two conditions to determine whether a service qualifies as an export or not- (i) the service must be provided from India and used outside India and (ii) the payment for the service provided must be received in convertible foreign exchange. Apart from these two common conditions which are applicable to all taxable services, the rules categorizes the services all taxable services and prescribes specific conditions for the same- (i) service should be in relation to an immovable property located outside India; (ii) the service should be performed fully or partly outside India; or (iii) the service recipient should be located outside India.
Among these three, the most controversial has been the third category which provides for a condition ‘service recipient should be located outside India'. In cases where the service recipient was located outside India, the department started troubling the exporter of services on the ground that though the service recipient is located outside India, the assessee did not fulfill the condition of ‘used outside India'. The worst affected of the lot was the marketing agents of foreign sellers and all those who provided Business Auxiliary Services. The service providers of Business Auxiliary services were under constant harassment from the department on the ground that marketing, business promotion etc are activities which takes place within India and hence, does not fulfill the condition of services being used outside India.
On 24.2.2009, Central Board of Excise & Customs vide Circular No. 111/05/2009 clarified that the criteria for determining whether the ‘service is used outside India' is to see whether the benefit has accrued outside India or not. Hence, the activities undertaken by an Indian agent for the marketing of the goods of a foreign supplier in India would be treated as export of service. This circular had provided a great relief to the exporters. However this relief did not last very long. In Microsoft India Corporation (India) Pvt. Ltd v. Commissioner reported in 2009 (15) STR 680 the honb'le Delhi tribunal made an observation in its stay order that the C.B.E. C circular dated 24.2.2009 is contrary to the ratio laid down by the hon'ble Supreme court in All India Fedn. of Tax Practitioners reported in 2007-TIOL-149-SC-ST that as services are performed in India, the same is destined to be exhausted in India and hence used within India. This decision by the tribunal takes a different stand from the earlier decisions by the Bangalore tribunal in ABS India Ltd v. Commissioner reported in 2008-TIOL-2102-CESTAT-BANG and Blue Star v. Commissioner reported in 2008-TIOL-716-CESTAT-BANG wherein the tribunal observed that as long as the recipient is located outside, it cannot be said that services are used in India. Though a writ petition was filed against this decision before the Hon'ble Delhi High court, the same was dismissed by the court thereby upholding the decision of the tribunal 2009-TIOL-601-HC-ST. The observations made by the Delhi tribunal in the light of the facts in that case where Microsoft Corporation Pvt. Ltd, Singapore appointed Microsoft India Corporation (India) Pvt. Ltd to provide business support services including marketing services, product support services and consulting services to end-users in India seems to be correct to that extent that it is confined with respect to the specific facts of the Microsoft case. It would not be rational to apply the observation made by the tribunal with respect to CBEC circular dated 24.2.2009 to all kinds of business auxiliary services wherein the service provider only provides marketing services and not product support services. Reading this decision broadly would add up to the confusion.
Conclusion
It appears that the above-mentioned decision, by taking a narrow interpretation cuts down the scope of the Rules. It is in this chaotic scenario, the Budget 2010-2011 makes an amendment to Export of Service Rules by deleting ‘such service is provided from India, and used outside India' with effect from 26.2.2010 thereby simplifying the Rules. This deletion in the Rules is expected to address all the controversies revolving around the Export of Service Rules and minimize the litigation. This move by the Finance minister appears to be a great one and very much to be welcomed by the exporters. The deletion can definitely lead to a less troublesome export of services provided it is implemented suitably. Nevertheless, with respect to period prior to 26.2.2010, the phrase ‘such service is provided from India, and used outside India' would be operative and department relying on the decision in Microsoft case would continue to trouble the exporters.
(Published in www.taxindiaonline.com, March 30, 2010) |
