2008 (12) TMI 41 - HC - Service Tax

Provisions of Rule 2(1)(d)(iv) can not create any tax liability which is not authorized by law. Before insertion of section 66A with effect from 18-4-2006, there was no authority to levy service tax on Import of service. Explanation below section 65(105) did not give any authority to levy service tax on import of services.

Issues Involved:

1. Constitutional validity of Section 66A of the Finance Act, 1994.
2. Validity of the explanation to Section 65(105) of the Finance Act, 1994.
3. Validity of Rule 2(1)(d)(iv) of the Service Tax Rules, 1994.
4. Levy of service tax on services rendered outside India to Indian residents.

Detailed Analysis:

1. Constitutional Validity of Section 66A of the Finance Act, 1994:

The petitioners initially challenged the constitutional validity of Section 66A of the Finance Act, 1994, but later did not press for this relief. They restricted their challenge to the levy of service tax from 1-3-2002 to 18-4-2006, before Section 66A came into force.

2. Validity of the Explanation to Section 65(105) of the Finance Act, 1994:

The explanation to Section 65(105) was added on 16-6-2005, declaring that services provided by a non-resident to a person in India are deemed taxable services. However, the court found that this explanation did not authorize the levy of service tax on the recipients of the service, who are based in India. The charge of the tax continued to be on the provider of the service as per the scheme of the Act.

3. Validity of Rule 2(1)(d)(iv) of the Service Tax Rules, 1994:

Rule 2(1)(d)(iv), effective from 16-8-2002, made the recipient of services in India liable for paying service tax for services provided by non-residents. The court held this rule invalid as it conflicted with Section 68 and other provisions of the Act, which placed the responsibility of service tax on the service provider, not the recipient.

4. Levy of Service Tax on Services Rendered Outside India to Indian Residents:

The court examined whether there was valid law authorizing the levy of service tax on services rendered outside India during the period from 1-3-2002 to 17-4-2006. The court noted that:

- Notification dated 1-3-2002: This extended the provisions of Chapter V of the Finance Act to the continental shelf and exclusive economic zone of India but did not authorize the levy of service tax on recipients of services outside India.
- Notification dated 31-12-2004: Issued under Section 68(2), it did not justify the levy of service tax on services rendered outside India by non-residents.
- Explanation to Section 65(105): Added on 16-6-2005, it did not provide authority to levy service tax on recipients of services outside India.

The court referenced the Supreme Court's judgment in Laghu Udyog Bharati v. Union of India, which invalidated similar provisions shifting the tax burden to service recipients. The court concluded that before the enactment of Section 66A on 18-4-2006, there was no authority to levy service tax on Indian residents for services received outside India.

Conclusion:

The petition was allowed, and the respondents were restrained from levying service tax from the members of the petitioners' association for the period from 1-3-2002 to 17-4-2006 for services received outside India. The court made the rule absolute with no order as to costs.

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