Place of Provision of Service - Including Issues

Introduction

Under earlier method of taxation (positive list based) the services which were provided in India were taxable, without any distinction of from where. Section 66A was introduced to tax services which was provided from outside India and received in India (commonly known as import of services). At same time there was relaxation from payment of service tax for services considered as Export of services in terms of the conditions set out in Rules.

The Rules governing export of services was the Export of Service Rules , 2005 and rules governing the services provided from outside India was Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. However, in light of new service tax law, these rules are not be applicable from 01.07.2012 and those concepts also would not be applicable. Now the place of provision of Service Rules, 2012 has to be considered to ascertain local or international transactions.

What is Relevance of Place of Provision of Service?

With the introduction of new scheme of tax, the determination of tax is dependent upon whether the services are provided within the taxable territory or not. If it is provided within the taxable territory, it would be taxable and if not in taxable territory not taxable. This would be the position irrespective where the service provider or service receivers are located.

Services being intangible it requires guidelines as to determination of the place providing service to ascertain taxability considering whether it is provided within taxable territory or not. For providing such guidelines Place of Provision of Services Rules, 2012 was notified.

Determining Location of service provider and location of service receiver

Before we go to indentify the place of provision of service, one has to first identify where the location of service provider and location of service receiver.

The location of a service provider or receiver (as the case may be) is to be determined by applying the following steps sequentially:

A. If the service provider/receiver has obtained only one registration, may be centralized (in case of multiple places) or otherwise (having only one place) - the premises for which such registration is taken is the location

B. In other cases i.e. either no registration is taken or multiple registration is taken the location of service provider/receiver is identified sequentially as follows:

a.  If services are provided from Business Establishment (place where management and control exist) – Place of such business establishment is the location

b. If services are not so provided but from other establishment (fixed establishments) – Place of such fixed establishment is the location

c.  If the services are provided from / received by more than one locations - the establishment most directly concerned with the provision of service / use of the service is the location

d. In the absence of any places mentioned above – usual place of residence is the location.

Determination of place of provision

The Place of Provision of Services has been structured by breaking up the services from Rule 4 to Rule 12 into sectors i.e. on following basis (separately explained later as to its scope):

a. Rule 4- Based on the performance of service

b. Rule 5- Based on location of immovable property

c. Rule 6- Based on place of holding event

d. Rule 7- Based on performance of services at more than one location

e. Rule 8- Based on the provision of service where provider and recipient both located in taxable territory

f. Rule 9- Based on specified services where place of provision is at location of service provider

g. Rule 10- Based on destination based transportation of goods services

h. Rule 11- passenger transportation service based on place where the passenger embarks on the conveyance for a continuous journey,

i. Rule 12- based on services provided on board conveyance in course of a passenger transport operation.

When none of these specific rules is applicable, then the place of provision is determined based on default Rule 3, according to which, the place of provision of service would be based on location of recipient of service. However, in the ordinary course of business, the location of service receiver is not available (say for example walk in customers where the location of service receiver is not known ordinarily), then the place of provision is the place of the service provider. 

Power of Central Government to notify the place of provision

In addition to the above determination as mentioned above, Rule 13 empowers the Central Government to notify the type of services or circumstances in which cases the place of provision would be the place of effective use and enjoyment of a service. As on date the Central Government has not notified any type services in this regard.

Resolving conflict in case more than one rule covering the situation.

As per Rule 14, provides that where the place of provision of a service could be determined under more than one rule as it fits in there, it has to be determined according to the rule that occurs later among the rules that are equally meriting consideration.

For example based on the performance rule (Rule 4) the place of provision is say New-York, however by virtue of Rule 8 (which provides that if both provider and receiver are located in taxable territory the location of receiver of service to be taken) the place of provision is New Delhi, the place of provision would be New-delhi as Rule 8 occurs later amount Rule 8 and Rule 4.

What is Place of provision of service as per the specific rules?

The brief scope and coverage of each rule is as follows:

Note: for understanding certain terms used in this table or any other place, reference may be made to Place of Provision of Rules, 2012 for better understanding.

Issues -  Place of Provision of Services Rules

Whether service tax liability is attracted when place of provision of service as determined by applying these rules is outside India?

Comments: No, the service tax is not leviable when place of provision of service by applying the POP Rules is outside taxable territory of India. Service tax is payable merely in respect of services [other than negative list or exempted] which are provided within taxable territory of India.

Whether person who makes a payment for a service is a receiver of service?

Comments: 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.

Rule 12:

What is place of provision of service when movie on demand is provided on board a flight from Mumbai to USA?

Comments: The place of provision of service is first scheduled point of departure of that conveyance for the journey in this case Mumbai.

Rule 11:

What is the place of provision of passenger transportation services?

Comments: The place of provision of a passenger transportation service is the place where the passenger embarks on the conveyance for a continuous journey.

What does a “continuous journey” mean?

Comments: A “continuous journey” means a journey for which:-

(i) a single ticket has been issued for the entire journey; or

(ii)  more than one ticket or invoice has been issued for the journey, by one service provider, or by an agent on behalf of more than one service providers, at the same time, and there is no scheduled stopover in the journey

Whether 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.

Comments: All stopovers do not cause a break in continuous journey. Only the stopovers for which one or more separate tickets are issued would be considered as a break in journey. As in this case a single ticket is issued it would be considered as a continuous journey. This is covered in Rule 11. Place of provision of service is place from where passenger embarks for such journey I e Delhi.

Rule 10:

When the goods are consigned on freight paid basis by consignor company to be transported by GTA from Delhi to Amritsar, what is place of provision of service?

Comments: In case of transport of goods by GTA place of provision of service is location of person who is liable to pay freight. Accordingly place of provision of service is Delhi.

Rule 9:

Which are the services which are covered in Rule 9 of Place of Provision of Services Rules?

Comments: 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.

Whether taxation services, international advisory assignment services provided online to US clients by an Indian tax consultancy firm is covered as online information and data base access and retrieval services in Rule 9 of POP Rules?

Comments: No, the use of the computers is secondary and primary work is business related work. This would not be covered in Rule 9. Therefore place of provision of service is not location of service provider. This could be covered in Rule 3. Then place of provision of service is location of service receiver. As recipient client is located outside, place of provision is outside India. Therefore not liable to service tax.

Whether banking services by SBI to a US bank is covered in Rule 9?

Comments: If such services are not provided to an account holder, it is not covered in this Rule. In this case services are provided to bank and not to account holder. Rule 9 is not applicable. Therefore place of provision of service is not location of service provider. In the case of any service which does not qualify as a service provided to an account holder the place of provision will be determined under the default rule 3. The place of provision of services would be the location of the service receiver in USA. Therefore as location of recipient is outside India, place of provision of service is outside India. It is not liable to service tax in India.

Whether Indian company enabling a US company to locate and appoint a sampler in India to check quality of materials being sourced to US company is covered in Rule 9 as intermediary services?

Comments: These services could be of nature of intermediary services covered in Rule 9.“Intermediary” means a broker, an agent  or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) between two or more persons, but does not include a person who provides the main service on his account. In instant case as the Indian company has facilitated vendor to provide sampling services to US company. The place of provision is the location of the service provider Indian company in India.

Rule 8:

When the Event management company of Delhi is contracted by Dreamworks Company Bangalore to organize awards nitein UK, what is place of provision of service?

Comments: As per Rule 8 of Place of Provision of Service Rules, 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. Bangalore. Place of provision being in the taxable territory, the service would be taxable in India.

Rule 7:

When series of Save The Earth seminars is organised by US company under contract with Non-conventional Resources company, Delhi at various locations namely at New York, London, Paris and Bangalore in India, what is place of provision of service?

Comments: The place of provision as per Rule 7 of Place of Provision of Services Rules will be the place in the taxable territory where the greatest proportion of service is provided, in this case Bangalore. As place of provision of service is in India, it is liable to service tax.

Rule 6:

What is the place of provision of services relating to event organised in Tokyo by Indian company?

Comments: Place of provision of services provided by way of admission to, or organization of a cultural, artistic, sporting, scientific, educational, entertainment event, or a celebration, conference,fair, exhibition, or any other similar event and of services ancillary to such admission, shall be the place where the event is held. For example when event management services are provided in Tokyo by Indian company, the place of provision of services is location where event is held. As event held in Tokyo, it is not liable to service tax.

Rule 5:

Whether consultancy leading to opinion on applicability of service tax on renting of immoveable property in Delhi to UK company by consultant in Bangalore is covered in Rule 5?

Comments: It is basically advice on indirect taxation legislation in general even though it relates to the subject of an immovable property. This will not be treated as a service in respect of the immovable property. This would be covered in Rule 3, whereby the place of provision of service is location of service recipient in UK.

Whether the design services to US company by Indian firm in relation to construction of a complex in Bangalore is liable to service tax in India?

Comments: The design services related to proposed construction of a complex which is an immoveable property is covered in Rule 5. As the place of provision of service as per this rule would be proposed location of immoveable property of building. As building would be located in India. Place of provision of service is location of such immoveable property in Bangalore. Therefore liable to service tax.

Rule 4:

What is place of provision of installation services by Indian company in relation to filters sold by German company to Bangalore customers?

Comments: This is covered in Rule 4(a) as per which services in respect of goods that are required to be made physically available by the recipient of service to the provider of service. The place of provision of services is location where services are performed. These services are in respect of filters which is a goods.   The goods are made available by the service receiver in order to facilitate provision of service.  Therefore place of provision of service is place where services are performed. As services are performed in Bangalore, it is liable to service tax.

What is place of provision of service in respect of coaching by Bangalore coaching academy to US company employees provided in USA?

Comments: These are services covered in Rule 4(b) of Place of Provision of Services Rules. As per which services that are provided “to an individual which require the physical presence of the receiver with the provider for provision of the service. As coaching is provided in physical presence of the service receiver to provide coaching.It is covered in this sub-rule. The place of provision of service is location of performance of service, that is USA. Therefore not liable to service tax in India.

Rule 3:

When company in USA charges for electronic downloads of software licenses to Indian company, whether it is liable to service tax?

Comments: Such services are of nature of right to use software services which is given electronically. As software is goods. This could be covered in declared services entry of transfer of goods by hiring without transfer of right to use such goods. Therefore as services are received from outside India by recipient in India, it is taxable in hands of recipient Indian company under reverse charge mechanism.

General issues:

Whether if place of provision of service is outside India as per Place of provision of Services Rules, it is treated as export of services?

Comments: No, only if the conditions set out in Rule 6A of Service Tax Rules is fulfilled, then taxable services provided outside India is treated as export of services-

The conditions are set out below.

I.  The provider of service is located in the taxable territory- Yes-provider of service is located in the taxable territory of India.

II.  The recipient of service is located outside India- Yes-recipient of service is located outside India.

III.  The service is not specified under the negative list of services- Yes-the service is not specified under the negative list.

IV. The place of provision of services is outside India-Yes – The place of provision of services as per Place of provision Services is outside India.

V. The payment for such service has been received by the provider of service in convertible foreign exchange- Yes –the payment for such service would be received by service receiver in convertible foreign exchange and

VI. The provider and the recipient of service are two distinct establishments and not merely establishments of the same person- Yes –provider of service and service receiver are two different companies. It is not merely establishments of the same person.

This conclusion would be relevant in the context of availing Cenvat credit and refund claims if any.

Whether service tax liability on services received from outside India can be paid by utilizing cenvat credits by receiver of service under reverse charge mechanism?

Comments: Due to specific restriction in cenvat credit rules wef 1.7.2012, the service receiver cannot utilize cenvat credits to pay service tax on taxable services where he is liable as a receiver of service. Earlier to that date it was possible to make such an adjustment. It was accordingly held in Aravind Fashions decision.

In recent decision in CST vs. Aravind Fashions Ltd(TIOL-2011-748-HC-KAR-ST), it was held that for the payment of service tax, importer is to be treated at par with the service provider. Held by High Court the service recipient who is liable to pay service tax, is entitled to utilize credit to discharge service tax liability.

In this article the paper writer has tried to bring an element of clarity on place of provision of service rules. In case readers have any specific queries, they may host them on www.pdicai.org.  

CA Madhukar N.Hiregange

Acknowledgements to CA Roopa Nayak for preparation of the basic article.