2010 (11) TMI 187 - HC - Service Tax

Import of services - Explanation to Sec. 65(105) of the Finance Act, 1994, read with amended Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, coming into effect from 16-6-2005 is ultra vires Sections 64, 65, 66, 67 and 68 of the Finance Act, 1994 - The Bombay High Court held that before enactment of Section 66A it is apparent that there was no authority vested by law in the Respondents to levy service tax on a person who is resident in India, but who receives services outside India - It is admitted that after the introduction of Section 66A the explanation to Section 65(105) was also deleted - Hence, the show cause notice issued, on the basis of explanation Section 65(105) of the Finance Act, 1994, read with amended Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 are not valid in law and liable to be quashed.

Summary

Issues:
Challenge to the vires of Explanation to Sec. 65(105) of the Finance Act, 1994 and amended Rule 2(1)(d)(iv) of the Service Tax Rules, 1994. Validity of show cause notices issued under the explanation. Interpretation of legal provisions regarding service tax on services provided outside India but received in India.

Analysis:
The petitioners sought a declaration that the Explanation to Sec. 65(105) of the Finance Act, 1994, along with the amended Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, is ultra vires various sections of the Finance Act. They argued that service tax cannot be extended to services provided by entities outside India to recipients in India. Some petitioners also challenged show cause notices issued under this explanation. The crux of the issue revolved around the legality of levying service tax on cross-border services.

The learned Senior Counsel contended that service tax could not be imposed without creating a charge on the service receiver, which was introduced through Section 66(A) of the Finance Act. They argued that service tax levied before 18-4-2006 on services provided from outside India was unlawful. On the other hand, the respondent's counsel argued that the Explanation to Sec. 65(105) was valid and cited relevant judgments to support their stance. The debate centered on the authority to levy service tax on international services.

Referring to a previous judgment of the Bombay High Court, the petitioners highlighted the significance of Section 66(A) in empowering the taxation of services received in India from abroad. The Bombay High Court's ruling, upheld by the Supreme Court, emphasized that service tax could not be imposed before 17-4-2006. It clarified that legal authority to levy service tax on recipients of taxable services from abroad was granted only after the enactment of Section 66(A). This legal interpretation influenced the decision in the current case, leading to the quashing of show cause notices issued based on the Explanation to Sec. 65(105) and amended Rule 2(1)(d)(iv).

In conclusion, the judgment underscored the necessity of legal provisions like Section 66(A) for levying service tax on cross-border services and emphasized the timeline for the imposition of such taxes. The interplay between domestic and international service transactions was a critical aspect of the court's analysis, ultimately resulting in the allowance of the writ petitions and the closure of related miscellaneous petitions.