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TMI BlogPlace of Provision of Services.X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice will be determined based on the "place of its provision". The 'Place of Provision of Services Rules, 2012' will replace the 'Export of Services, Rules, 2005' and 'Taxation of Services (Provided from outside India and received in India) Rules, 2006. 5.1.2 For whom are these rules meant? These rules are primarily meant for persons who deal in cross-border services. They will also be equally applicable for those who have operations with suppliers or customers in the state of Jammu and Kashmir. Additionally service providers operating within India from multiple locations, without having centralized registration will find them useful in determining the precise taxable jurisdiction applicable to their operations. The rules will be equally relevant for determining services that are wholly consumed within a SEZ, to avail the outright exemption. 5.1.3 What is the basic philosophy of these rules? The essence of indirect taxation is that a service should be taxed in the jurisdiction of its consumption. This principle is more or less universally applied. In terms of this principle, exports are not charged to tax, as the consumption is elsewhere, and ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay tax on reverse charge basis. 6. Is the service receiver an individual or government receiving services for a nonbusiness purpose, or a charity receiving services for a charitable activity? If yes, the same is exempted. 7. If not, he is liable to pay tax. 5.2.2 What is "taxable territory"? What is its significance? Taxable territory has been defined in sub-section 52 of section 65B. It means the territory to which the provisions of Chapter V of the Finance Act, 1994 apply i.e. whole of India excluding the state of Jammu and Kashmir. "Non-taxable territory" is defined in sub-section 35 ibid accordingly as the territory other than the taxable territory. "India" is defined in sub-section 27 of section 65 B, as follows: "India" means-- (a) the territory of the Union of India as referred to in clauses (2) and (3) of article 1 of the Constitution; (b) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976; (c) the sea-bed and the subsoil underlying the territorial waters; (d) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the service is "used" or "consumed". Flow Diagram F1 at the end of this section illustrates the manner of determination of location. 5.2.5 What is the meaning of "business establishment"? 'Business establishment' is the place where the essential decisions concerning the general management of the business are adopted, and where the functions of its central administration are carried out. This could be the head office, or a factory, or a workshop, or shop/ retail outlet. Most significantly, there is only one business establishment that a service provider or receiver can have. 5.2.6 What is the meaning of a "fixed establishment"? A "fixed establishment" is a place (other than the business establishment) which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to provide the services that are to be supplied by it, or to enable it to receive and use the services supplied to it for its own needs. Temporary presence of staff by way of a short visit at a place cannot be called a fixed establishment. Also, the number of staff at a location is not importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to carry on its business by managing the property, this will create a fixed establishment in India. Illustration 4 A company is incorporated in India, but provides its services entirely from Singapore. The location of this service provider is Singapore, being the place where the establishment most directly concerned with the supply is located. 5.2.8 What does "usual place of residence" mean? The usual place of residence, in case of a body corporate, has been specified as the place where it is incorporated or otherwise legally constituted. The usual place of residence of an individual is the place (country, state etc) where the individual spends most of his time for the period in question. It is likely to be the place where the individual has set up his home, or where he lives with his family or is in full time employment. Individuals are not treated as belonging in a country if they are short term, transitory visitors (for example if they are visiting as tourists, or to receive medical treatment or for a short term language/ other course). An individual cannot have more than one place of usual residence. In addition, in the case of telecommunication services, it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x liability will be discharged by ABC, being the service provider and being located in taxable territory. However, if ABC were to supply the same service to a recipient DEF located in non-taxable territory, the provision of such service is not taxable, since the receiver is located outside the taxable territory. If the same service were to be provided to PQR (located in taxable territory) by an overseas provider XYZ (located in non-taxable territory), the service would be taxable, since the recipient is located in the taxable territory. However, since the service provider is located in a nontaxable territory, the tax liability would be discharged by the receiver, under the reverse charge principle (also referred to as "tax shift"). 5.3.3 Who is the service receiver? Normally, the person who is legally entitled to receive a service and, therefore, obliged to make payment, is the receiver of a service, whether or not he actually makes the payment or someone else makes the payment on his behalf. Illustration A lady leaves her car at a service station for the purpose of servicing. She asks her chauffer to collect the car from the service station later in the day, after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in terms of proviso to section 66B, the establishments in a taxable and non-taxable territory are to be treated as distinct persons. Moreover, the definition of "location of the receiver" clearly states that "where the services are "used" at more than one establishment, whether business or fixed, the establishment most directly concerned with the use of the service" will be the location. Thus, the taxing jurisdiction of service, which is provided under a 'global framework agreement' between two multinational companies with the business establishment located outside the taxable territory, but which is used or consumed by a fixed establishment located in the taxable territory, will be the taxable territory. Illustration The following example illustrates the above, by comparing the place of provision of services rendered under a Global Agreement [A 'Global Contract or Agreement' is between two parent companies for provision of services from one to the other, where actual provision of services is to be made to subordinate offices of the recipient company in different tax jurisdictions.] vis-a-vis a Global Framework Agreement [A 'Global Frame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement covers the broad contours of supply between the two parties, payment milestones, obligations relating to confidentiality, penalty for default, limitations of liability and warranties etc, which would apply as and when group companies enter into separate agreements, in accordance with the terms envisaged in the framework agreement. BBB-X and BBB-Y could then enter into separate and independent business agreements with AAA-X and AAA-Y, in countries X and Y respectively, for provision of IT services. There are four agreements, but only three transactions involving provision of services, as indicated in the Flow diagram F3- Scenario 2 at the end of this section. 5.3.5 What is the place of provision where the location of receiver is not ascertainable in the ordinary course of business? Generally, in case of a service provided to a person who is in business, the provider of the service will have the location of the recipient's registered location, or his business establishment, or his fixed establishment etc, as the case may be. However, in case of certain services (which are not covered by the exceptions to the main rule), the service provider may not have the location of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... door surveys. 5.4.2 What is the implication of the proviso to sub-rule (1)? The proviso to this rule states as follows:- "Provided further that where such services are provided from a remote location by way of electronic means, the place of provision shall be the location where goods are situated at the time of provision of service." In the field of information technology, it is not uncommon to provide services in relation to tangible goods located distantly from a remote location. Thus the actual place of performance of the service could be quite different from the actual location of the tangible goods. This proviso requires that the place of provision shall be the actual location of the goods and not the place of performance, which in normal situations is one and the same. 5.4.3 What are the services that are provided "to an individual,..., which require the physical presence of the receiver,..., with the provider for provision of the service."?- sub-rule (2) Certain services like cosmetic or plastic surgery, beauty treatment services, personal security service, health and fitness services, photography service (to individuals), internet cafe service, cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: " 'Immovable Property' shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth." It may be noted that the definition is inclusive and thus properties such as buildings and fixed structures on land would be covered by the definition of immovable property. The property must be attached to some part of earth even if underwater. 5.5.2 What are the criteria to determine if a service is 'directly in relation to' immovable property located in taxable territory? Generally, the following criteria will be used to determine if a service is in respect of immovable property located in the taxable territory: (i) The service consists of lease, or a right of use, occupation, enjoyment or exploitation of an immovable property; (ii) the service is physically performed or agreed to be performed on an immovable property (e.g. maintenance) or property to come into existence (e.g. construction); (iii) the direct object of the service is the immovable property in the sense that the service enhances the value of the property, affects the nature of the property, relates to prep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of land or property. In other words, the immovable property must be clearly identifiable to be the one from where, or in respect of which, a service is being provided. Thus, there needs to be a very close link or association between the service and the immovable property. Needless to say, this rule does not apply if a provision of service has only an indirect connection with the immovable property, or if the service is only an incidental component of a more comprehensive supply of services. For example, the services of an architect contracted to design the landscaping of a particular resort hotel in Goa would be land-related. However, if an interior decorator is engaged by a retail chain to design a common decor for all its stores in India, this service would not be land-related. The default rule i.e. Rule 3 will apply in this case. 5.5.5 Examples of services which are not land-related (i) Repair and maintenance of machinery which is not permanently installed. This is a service related to goods. (ii) Advice or information relating to land prices or property markets because they do not relate to specific sites. (iii) Land or Real Estate Feasibility studies, say in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt performance of a service at different locations 5.7.1 What does this Rule imply? This Rule covers situations where the actual performance of a service is at more than one location, and occasionally one (or more) such locations may be outside the taxable territory. This Rule states as follows:- "Where any service stated in rules 4, 5, or 6 is provided at more than one location, including a location in the taxable territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is provided". The following example illustrates the application of this Rule:- lllustration 1 An Indian firm provides a 'technical inspection and certification service' for a newly developed product of an overseas firm (say, for a newly launched motorbike which has to meet emission standards in different states or countries). Say, the testing is carried out in Maharashtra (20%), Kerala (25%), and an international location (say, Colombo 55%). Notwithstanding the fact that the greatest proportion of service is outside the taxable territory, the place of provision will be the place in the taxable territory where the greatest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the place of provision would be Nepal i.e. outside the taxable territory. However, by application of Rule 7, since the service provider, as well as the receiver, are located in the taxable territory, the place of provision of this service will be within the taxable territory. 5.9 Rule 9- Specified services- Place of provision is location of the service provider 5.9.1 What are the specified services where the place of provision is the location of the service provider? Following are the specified services where the place of provision is the location of the service provider:- (i) Services provided by a banking company, or a financial company, or a non-banking financial company to account holders; (ii) Online information and database access or retrieval services; (iii) Intermediary services; (iv) Service consisting of hiring of means of transport, up to a period of one month. 5.9.2 What is the meaning of "account holder"? Which accounts are not covered by this rule? "Account" has been defined in the rules to mean an account which bears an interest to the depositor. Services provided to holders of demand deposits, term deposits, NRE (non-resident external) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieval or both, in electronic form through computer network, in any manner. Thus, these services are essentially delivered over the internet or an electronic network which relies on the internet or similar network for their provision. The other important feature of these services is that they are completely automated, and require minimal human intervention. Examples of such services are:- (i) online information generated automatically by software from specific data input by the customer, such as web-based services providing trade statistics, legal and financial data, matrimonial services, social networking sites; (ii) digitized content of books and other electronic publications, subscription of online newspapers and journals, online news, flight information and weather reports; (iii) Web-based services providing access or download of digital content. The following services will not be treated as "online information and database access or retrieval services":- (i) Sale or purchase of goods, articles etc over the internet; (ii) Telecommunication services provided over the internet, including fax, telephony, audio conferencing, and videoconferencing; (iii) A service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng or selling of goods is excluded] (iv) Recovery Agent Even in other cases, wherever a provider of any service acts as an intermediary for another person, as identified by the guiding principles outlined above, this rule will apply. Normally, it is expected that the intermediary or agent would have documentary evidence authorizing him to act on behalf of the provider of the 'main service'. Illustration A freight forwarder arranges for export and import shipments. There could be two possible situations here- one when he acts on his own account, and the other, when he acts as an intermediary. When he acts on his own account (say, for an export shipment) A freight forwarder provides domestic transportation within taxable territory (say, from the exporter's factory located in Pune to Mumbai port) as well as international freight service (say, from Mumbai port to the international destination), under a single contract, on his own account (i.e. he buys-in and sells fright transport as a principal), and charges a consolidated amount to the exporter. This is a service of transportation of goods for which the place of supply is the destination of goods. Since the destinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a service of transportation of goods 5.10.1 What are the services covered under this Rule? Any service of transportation of goods, by any mode of transport (air, vessel, rail or by a goods transportation agency), is covered here. However, transportation of goods by courier or mail is not covered here. 5.10.2 What is the place of provision of a service of transportation of goods? Place of provision of a service of transportation of goods is the place of destination of goods, except in the case of services provided by a Goods Transportation Agency in respect of transportation of goods by road, in which case the place of provision is the location of the person liable to pay tax (as determined in terms of rule 2(1 )(d) of Service Tax Rules, 1994 (since amended). Illustration A consignment of cut flowers is consigned from Chennai to Amsterdam. The place of provision of goods transportation service will be Amsterdam (outside India, hence not liable to service tax). Conversely, if a consignment of crystal ware is consigned from Paris to New Delhi, the place of provision will be New Delhi. 5.10.3 What does the proviso to this Rule imply? The proviso to this Rule states as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service providers, at the same time, and there is no scheduled stopover in the journey. 5.11.3 What is the meaning of a stopover? Do all stopovers break a continuous journey? "Stopover" means a place where a passenger can disembark either to transfer to another conveyance or break his journey for a certain period in order to resume it at a later point of time. All stopovers do not cause a break in continuous journey. Only such stopovers will be relevant for which one or more separate tickets are issued. Thus a travel on Delhi-London-New York-London-Delhi on a single ticket with a halt at London on either side, or even both, will be covered by the definition of continuous journey. However if a separate ticket is issued, say New York-Boston-New York, the same will be outside the scope of a continuous journey. 5.11.4 The Table below contains illustrations which explain the principle enunciated in this Rule. Illustrations S. No. Journey Place of Provision Taxability Single Ticket (No stopover) 1 Mumbai-Delhi Mumbai Yes, Mumbai being the place of embarkation. 2 Mumbai-Delhi-Jaipur Mumbai Yes, Mumbai, being the place of embarkation for the continuous jo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the continuous journey with single, return ticket.Journey (b) is taxable, since place of provision is in taxable territory for the journey with single, return ticket. 6 (a) Jammu-Delhi (b) Delhi-Bangkok-Delhi (c) Delhi-Lucknow (d) Lucknow-Jammu Jammu is place of provision for journey (a); Delhi is place of provision for journey (b); Delhi is place of provision for journey (c); Lucknow is place of provision for journey (d) Journey (a) is not taxable since place of provision is not in taxable territory; Journeys (b), (c) and (d) are taxable since place of provision is in taxable territory for each of these. It may also be pertinent to mention that for flights originating from, or terminating in, the northeast region, though the place of provision will be determined in terms of this rule, there is an exemption for air transportation of passengers, embarking from, or terminating in an airport located in the state of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Bagdogra located in West Bengal. The examples in the table below illustrate some situations. S. No. Journey Place of Provision Taxability Single ticke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us) will be covered here. Some examples are on-board service of movies/music/video/software games on demand, beauty treatment etc, albeit only when provided against a specific charge, and not supplied as part of the fare. 5.12.2 What is the place of provision of services provided on board conveyances? The place of provision of services provided on board a conveyance during the course of a passenger transport operation is the first scheduled point of departure of that conveyance for the journey. Illustration A video game or a movie-on-demand is provided as on-board entertainment during the Kolkata-Delhi leg of a Bangkok-Kolkata-Delhi flight. The place of provision of this service will be Bangkok (outside taxable territory, hence not liable to tax). If the above service is provided on a Delhi-Kolkata-Bangkok-Jakarta flight during the Bangkok-Jakarta leg, then the place of provision will be Delhi (in the taxable territory, hence liable to tax). 5.13 Rule 13- Power to notify services or circumstances 5.13.1 What is the implication of this Rule? This Rule states as follows:- "In order to prevent double taxation or non-taxation of the provision of a service, or for the unif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, videographers, and photographers. The service providers travel as part of the Indian pageant's entourage to South Africa. Some of these services are in the nature of personalized services, for which the place of provision would normally be the location where performed (Performance rule-Rule 4), while for others, under the main rule (Receiver location) the place of provision would be the location of receiver. Whereas, by application of Rule 8, since both the provider and the receiver are located in taxable territory, the place of provision would be the location of the service receiver i.e. New Delhi. Place of provision being in the taxable territory, the service would be taxable in India. By application of Rule 15, the later of the Rules i.e. Rule 8 would be applied to determine the place of provision. FLOW DIAGRAM F1 HOW TO DETERMINE LOCATION? FLOW DIAGRAM F 2 PROVISION OF SERVICES UNDER A 'GLOBAL AGREEMENT' - Scenario 1 FLOW DIAGRAM F 3 PROVISION OF SERVICES UNDER 'FRAMEWORK AGREEMENT'- Scenario 2 Agreement 1 is not transactional, has no consideration, and does not create a provision of service. Agreement 1 stipulates the terms and conditions whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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