2017 (9) TMI 98 - HC - Service Tax

Services provided by Indian tour operators to foreign tourists - place of provision of services - Vires of Rule 6A of the Service Tax Rules, 1994 - validity of Section 94 2 (f) of the FA - the present petition is concerned with the question of payment of service tax by the Indian tour operators in respect of the services provided by them to foreign tourists during the period between 1st July 2012 and 1st July 2017 - Held that - Turning to Section 94 (2), it basically lists out the topics on which rules can be made. It talks of laying down the procedure for carrying out various tasks set out in the FA or to provide the form in which returns are to be filed, appeals preferred. Specific to the case on hand, Section 94 (2) (f) empowers central government to make rules for determining when export of taxable services can be said to take place. It does not empower the central government to determine whether there can be an export of non-taxable services viz., services provided outside the taxable territory. Secondly, it does not empower the central government to make rules levying or making amenable the provision of certain services to service tax. Section 94 (2) (hhh) also permits making rules regarding the date for determination of rate of service tax and place of provision of taxable service . It does not provide for making rules on determination of taxability of a service. Subjecting certain types of services to tax is an essential legislative function. In this case, since the FA envisages Chapter V applying only to taxable services, bringing non-taxable services within the ambit of service tax, is impermissible. Since tour operator services are intermediary services and under Rule 9 of the PPSR 2012 the place of provision of service is the location of the service provider, the package tours service provided by an Indian tour operator to a foreign tourist will, notwithstanding that some part of it is provided outside India, be treated as service provided in India. As a result no Indian tour operator can expect the service rendered by him to a foreign tourist to be considered as an export of service under Rule 6A as he will never be able to meet the requirement of Rule 6A (1) (d) of the ST Rules. Thus under a combination of Rule 6A of the ST Rules and Rule 9 of the PPSR 2012 something which is non-taxable under the FA is sought to be brought to tax. While it is one thing to say that tour operator service provided in India is not in the negative list under Section 66 D of the FA and is, therefore, amenable to service tax, it is another to contend that notwithstanding that Chapter V of the FA applies only to taxable services by virtue of Section 64 (3) FA, a non-taxable service that is provided outside the taxable territory can also be included by Rule 6A of the ST Rules in determining what constitutes export of services. Thus not only Rule 6A but even Section 94 (2) (f) of the FA would also be unconstitutional if it were to be interpreted to permit determination of even export of non-taxable services not to talk of bringing to tax what is non-taxable under the FA. Section 6A (1) of the ST Rules, insofar as it applies to export of tour operator services, suffers from the vice of excessive delegation inasmuch as the central government has been permitted to determine what shall constitute export of services, both taxable and non-taxable. Such an essential legislative function could not have been delegated to the central government. Once the Parliament determines by law what is amendable and not amenable to service tax, the modalities for working out the procedure for levy and collection of such tax can be left to the Rules. However, the question of whether certain services should be amenable to tax cannot be left to be determined by rules made by the central government. The services provided by Indian tour operators to foreign tourists during the period 1st July 2012 to 1st July 2017, which has been paid for in convertible foreign exchange would not be amenable to service tax. Rule 6A (1) read with Section 6A (2) of the ST Rules, insofar as it seeks to describe export of tour operator services to include non-taxable services provided by tour operators, is ultra vires the FA and in particular Section 94(2) (f) of the FA and is, therefore, invalid. Section 94 (2) (f) or (hhh) of the FA does not empower the central government to decide taxability of the tour operator services provided outside the taxable territory. They only enable the central government to determine what constitutes export of service, the date for determination of the rate of service or the place of provision of taxable service - Section 66 C of the FA enables the central government only to make rules to determine the place of provision of taxable service but not nontaxable service. Petition allowed - decided in favor of petitioner.

Issues Involved:
1. Validity of Rule 6A of the Service Tax Rules, 1994 concerning 'Export of services'.
2. Validity of Section 94(2)(f) of the Finance Act, 1994.

Detailed Analysis:

Introduction and Background:
The writ petition by the Indian Association of Tour Operators seeks a declaration that Rule 6A of the Service Tax Rules, 1994 (ST Rules), concerning 'Export of services' is ultra vires the Finance Act 1994 (FA). The validity of Section 94(2)(f) of the FA is also challenged on the ground that it gives unguided and uncontrolled power to the central government to frame rules regarding 'provisions for determining export of taxable services'.

Position Prior to 1st July 2012:
Service tax was introduced by the FA with effect from 1st July 1994. Section 65(105)(n) of the FA defined 'taxable service' to mean any service provided by a tour operator in relation to a tour. Section 66 provided for the 'charge of service tax' at the rate of 12% of the value of the taxable service. Section 94(2)(f) empowered the central government to make rules 'for determining export of taxable services'. On this basis, the central government issued the Export of Services Rules 2005 (ESR 2005), which stated that export of taxable services shall be the provision of such services as are performed outside India. The resultant position was that even if a part of the service was performed outside India and the remaining in India, it would still be treated as having been performed outside India and thereby be construed as an export of service, exempt from service tax.

Position After 1st July 2012:
Significant changes were introduced in Chapter V of the FA with effect from 1st July 2012 by the Finance Act, 2012. Section 65 was omitted and substituted by Section 65B titled 'Interpretations'. Section 66B provided that service tax at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another. The net result was that services rendered outside the taxable territory of India would not be a 'taxable service' for the purposes of the FA.

Rule 6A Analysis:
Rule 6A of the ST Rules, inserted with effect from 1st July 2012, states that the provision of any service provided or agreed to be provided shall be treated as export of service when certain conditions are met. This rule brings within its ambit export of even non-taxable services, whereas Section 94(2)(f) permits making rules only in respect of 'taxable service'. This created problems for Indian tour operators organizing tours for foreign clients, as services provided outside India could not be made amenable to service tax under the FA since they were not rendered in the 'taxable territory'.

Foreign Trade Policy:
The Foreign Trade Policy (FTP) for years 2009-14 regarding export and import of goods and services stated that all tradable services covered under the General Agreement on Trade in Services (GATS) are considered as service exports if consideration is received in free foreign exchange.

Submissions on Behalf of the Petitioner:
The petitioner's counsel argued that Rule 6A suffers from the vice of excessive delegation as it brings non-taxable services within the ambit of service tax. It was contended that Rule 6A is ultra vires the FA. The counsel also pointed out that Section 94(2)(f) of the FA enabled the central government to make rules only for determining export of taxable services and not for levying tax on non-taxable services.

Submissions on Behalf of the Respondents:
The respondents' counsel argued that Rule 6A of the ST Rules was validly made in terms of the power granted to the central government under Section 94(2)(f) of the FA. It was maintained that the rules permitted levy of service tax since the service to the foreign tourist was provided in India by the tour operator located in India.

Judgment:
The Court declared that Rule 6A (1) read with Section 6A (2) of the ST Rules, insofar as it seeks to describe export of tour operator services to include non-taxable services provided by tour operators, is ultra vires the FA and in particular Section 94(2)(f) of the FA and is, therefore, invalid. Section 94(2)(f) or (hhh) of the FA does not empower the central government to decide the taxability of the tour operator services provided outside the taxable territory. They only enable the central government to determine what constitutes export of service, the date for determination of the rate of service, or the place of provision of taxable service. Section 66C of the FA enables the central government only to make rules to determine the place of provision of taxable service but not non-taxable service.

Conclusion:
The services provided by Indian tour operators to foreign tourists during the period 1st July 2012 to 1st July 2017, which have been paid for in convertible foreign exchange, would not be amenable to service tax. If any service tax becomes refundable as a result of this judgment, the claim for refund will be processed and paid in terms of the extant provisions of the FA read with the Central Excise Act 1944 and the rules thereunder. The writ petition was disposed of with no order as to costs.

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