Mr.Sushant Murthy i/b M.R.Baya for the Petitioners.

Transcription

1 - 1 - IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. WRIT PETITION NO.1449 OF Indian National Shipowners Association...Petitioner v/s. 1. Union of India 2. Central Board of Excise and Customs 3. Superintendent (Preventive) 4. Addl.Director Directorate General of Central Excise...Respondents... Mr.J.J.Bhat, Sr.Counsel with Mr.Rohan Shah and Mr.Sushant Murthy i/b M.R.Baya for the Petitioners. Mr.R.B.Raghuvanshi, ASG with Mr.A.S.Rao for the Respondents....

2 - 2 - CORAM: D.K.DESHMUKH & J.P.DEVADHAR, JJ. DATED: 11TH DECEMBER, 2008 JUDGMENT: (PER D.K.DESHMUKH, J.) 1. By this Petition the Petitioners challenge the constitutional validity of the following:- (i) Section 66A of the Finance Act, 1994; (hereinafter referred to as the "Act for the sake of brevity), which has been introduced with effect from 18th April, 2006; (ii) An explanation to Section 65(105) of the Act, which was in force between 16th June, 2005 and 17th April, 2006; and (iii) Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 inserted with effect from 16th August, 2002; 2. On the basis of the above provisions the

3 - 3 - Respondents are seeking to levy and recover service tax from the persons resident in India on the services which are rendered and/or performed out side India by non-resident service providers. By the aforementioned provisions although the services are performed out side India, the tax is sought to be levied and collected from the recipient of these services, who is based in India. 3. The Petitioner No.1 is the Indian National Ship Owners Association which is registered as a not-for-profit company under Section 25 of the Companies Act, 1956, and whose members are owners of Indian Flag Vessels. Currently, the Petitioner No.1 has 32 members with a combined gross registered tonnage of 7.2 million tonnes, which represents 90% of the total Indian tonnage. The Petitioner No.2 is a National and Citizen of India and is a shareholder of various companies which are members of Petitioner No.1, inter alia, engaged in the operation of ships. 4. In the petition, though the Petitioners challenge constitutional validity of Section 66A of the Act, at the outset, the learned Counsel appearing for the Petitioners stated that he does not press for the

4 - 4 - reliefs sought in relation to Section 66A of the Act. The learned Counsel submitted that from 1994 till 2002 there is no demand of service tax from the members of the Petitioners. Demand for service tax was made by the members of the Petitioners-Association for the period from till and from till date. But the Petitioners are restricting their challenge to the demand of service tax from the members of the Petitioner No.1-Association till when Section 66A was incorporated in the Act. In other words, the Petitioners by this petition now challenge only levy of service tax from till when Section 66-A came into force. 5. The learned Counsel appearing for the Petitioners submitted that though the service tax was introduced for the first time in the Chapter V of the Finance Act, 1994 in the year 1997 the definition of the term "taxable service" was substantially amended. According to the Petitioners, the Indian Shipping Industry is obliged by Statute under the provisions of the Merchant Shipping Act, 1958 and in terms of the normal conditions of trade, to obtain and consume outside India, the services listed hereunder.

5 - 5 - a. Customs House Agents Services b. Steamer Agents Services c. Clearing and Forwarding Agents Services. d. Port Services e. Cargo Handling Services f. Storage and Warehouse Services g. Maintenance or Repair Services h. Technical Inspection and Certification Services. i. Other Port Services j. General Insurance Services k. Manpower Recruitment and Supply Agency s Services l. Management Consultant s Services m. Banking and other Financial Services n. Business Auxiliary Services o. Technical Testing and Analysis Services p. Telegraph Services 6. So far as services rendered to the vessels and ships belonging to the members of the Petitioners-association outside India are concerned, according to the Petitioners till the month of February, 2002 there was no demand of service tax made from the members of the Petitioners-association. It is submitted by the Petitioners that the demand was not probably made from the members of the Petitioners-association, because as per the provisions of Section 64 of the Act, the Chapter extended to whole of India except the State of Jammu & Kashmir, therefore, the services rendered outside India was not to be taxed. The Petitioners pointed

6 - 6 - out that a question arose as to whether service tax is leviable in relation to the services provided outside Indian territorial water, and therefore, a circular was issued by the Government of India dated That circular reads as under:- Service Tax Circular No.36/4/2001 dated Government of India Ministry of Finance (Department of Revenue) Central Board of Excise & Customs, New Delhi I am directed to say that question has arisen whether services provided outside the limits of the Indian territorial waters are liable to Service Tax or not. The matter has been examined. At present the levy of service tax extends to the whole of India except the State of Jammu and Kashmir. The expression "India" includes the territorial waters of India. Indian territorial extend up to twelve nautical miles from the Indian land mass. Chapter V of the Finance Act which governs the levy of Service Tax has not extended to the levy to designated areas in the Continental Shelf and the Exclusive Economic Zone of India (as has been done in case of Central Excise vide Notification No.166/87-C.E., dated and in case of Customs by Notification Nos.11/87-Cus., Dated & 64/97-Cus., dated ). It is, therefore, clarified that the services provided beyond the territorial waters of India are not liable to Service Tax as provisions of Service tax have not been extended to such areas so far. Thus, it was clarified by the aforesaid circular that services provided beyond the territorial waters of

7 - 7 - India are not liable to service tax, as provisions of service tax have not been extended to such area so far. On 1st March,2002 a notification was issued by which provisions of Chapter V of the Act were extended to the continental shelf and exclusive Economic Zone of India. The notification dated 1st March, 2002 reads as under:- Notification: 1/2002-ST dated 1-March-2002 In exercise of the powers conferred by clause (a) of sub-section (6) of section 6, and clause (a) of sub-section (7) of section 7, of the Territorial Waters, Continental Shelf, Exclusive Economic Zone, and other Maritime Zones Act, 1976 (80 of 1976), the Central Government hereby extends the provisions Chapter V of the Finance Act (32 of 1994) to the designated areas in the Continental Shelf and Exclusive Economic Zone of India as declared by the Notifications of the Government of India in the Ministry of External Affairs Nos. S.O. 429 (E) dated the 18th July 1986 and S.O.643 (E), dated 19th September, 1996 with immediate effect. It is after issuance of this notification that for the first time demand of service tax was made from the members of the Petitioners-association in relation to the services received by them outside India even beyond the continental shelf and exclusive economic zone. Thus, so far as that period is concerned, the learned Counsel appearing for the

8 - 8 - Petitioners submitted that the services are rendered to vessels and ships of the members of the Petitioners-association beyond even continental shelf and exclusive economic zone. The learned Counsel further submitted that on a notification was issued by the Government of India in exercise of its power under sub-section 2 of Section 68 of the Act, and therefore, the demand of service tax was made from the members of the Petitioners-association in relation to the services received by them to their vessels and ships outside of India on the basis of the notification dated from Notification dated reads as under. Notification:36/2004-S.T. dated 31-Dec-2004 "In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 (32 of 1994), the Central Government hereby notifies the following taxable services for the purposes of the said sub-section, namely:- (A) the services:- (i) in relation to a telephone connection or pager or a communication through telegraph or telex or a facsimile communication or a leased circuit; (ii) in relation to general insurance business; (iii) in relation to insurance auxiliary

9 - 9 - service by an insurance agent; and (iv) in relation to transport of goods by road in a goods carriage, where the consignor or consignee of goods is,- (a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948); (b) any company established by or under the Companies Act, 1956 (1 of 1956); (c) any corporation established by or under the law; (d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; (e) any co-operative society established by or under any law; (f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder; or (g) any body corporate established, or a partnership firm registered, by or under any law; (B) any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India. 2. This notification shall come into force on the first day of January, The learned Counsel submitted that reading of sub-section 2 of Section 68 and this notification along with the scheme of the Act shows that under this notification the recipients of service cannot be made liable for levy of service tax. The learned

10 Counsel further submitted that on the Service Tax Rules 1994 were amended and a provision was added in Rule (2), which reads as under:- (iv) in relation to any taxable service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service provider does not have any office in India, the person who receives such service and has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India. By this provision while defining the term "person liable to pay service tax" a person who has received services outside India was made liable for levy of service tax. The learned Counsel submits that provision of Rule 2(d)(iv) quoted above is invalid, because it is contrary to the scheme of the Act. On , an amendment was made to the Act also, by which an explanation was added below Section 65(105). Which explanation reads as under:- Explanation- For the removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of

11 residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India, such service shall be deemed to be taxable service for the purposes of this clause. 8. The learned Counsel submits that by this explanation services provided by a person who does not have permanent residence in India to a person having present permanent residence in India is deemed to be taxable service. But by this explanation levy of service tax from the recipients of the service is not provided for. The learned Counsel submits that thus the levy of service tax from the members of the Petitioners-Association with effect from was on the basis of the explanation and the provision of Rule 2(1)(d)(iv) quoted above. The learned Counsel submits that the provisions of Rule 2(1)(d)(iv) are invalid and under the explanation service tax cannot be levied from the members of the Petitioners-association, who have received services to their vessels and ships outside India. With effect from Section 66-A was added to the Act. Which reads as under:- "(1) 66A (1) Where any service specified

12 in clause (105) of section 65 is, - (a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and (b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence in India, such service shall, for the purposes of this section, be the taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India and accordingly all the provisions of this Chapter shall apply; Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply; Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided. (2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section. Explanation 1.- A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.

13 Explanation 2.- Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted." 9. The learned Counsel submits that it is only from that a substitute provision was made for levy of service tax from a person who receives service outside India. Thus, according to the learned Counsel, before no service tax could have been levied on the members of the Petitioners-association whose vessels and ships receive service outside India. Though the learned Counsel appearing for the Petitioners submitted that service tax is sought to be levied from the members of the Petitioners-association from , in the written submission filed on behalf of the Respondents there does not appear to be any justification given for levying service tax from the members of the Petitioners-association whose vessels and ships receive services outside India. 10. In the written submission filed on behalf of the Respondents reliance is placed on the provisions of Rule 2(1)(d)(iv) of the Rules, which have come into force from to claim that in view of those Rules service tax was leviable. It was submitted

14 that it is unambiguously clear that a statutory effect had already been created w.e.f , by an omnibus provision made by incorporating clause (iv) in Rule 2(1)(d) of the Service Tax Rules under which every service receiver in India became liable to pay Service Tax in relation any taxable service provided by non-resident, who did not have office in India. This statutory effect has to be read harmoniously as if complementing the provisions of Section 68(2) as it existed prior to issue of Notification 36/2004-ST, dated rather than negating its existence or challenging its vires since the date of its incorporation, i.e The statutory effect created vide rule 2(1)(d)(iv) cannot be reduced by reference to a subsequently issued notification repeating the contents of the said rule. It was further submitted that in respect of the recipient of services who have been made liable to pay service tax on services received from foreign based persons, there is no denying the fact that the recipients of these services are the ultimate beneficiaries of the services rendered to them. Moreover, in the case of an indirect tax, it is the recipient of service who has to ultimately bear the incidence of a tax. Thus, the liability cast upon

15 the recipient of service has a direct connection with him and there exists a direct nexus between recipient of these services from foreign based service provider and the Indian Union. 11. The learned Counsel appearing for both sides relied on the judgment of the Supreme Court in the case of Laghu Udyog Bharati v/s. Union of India, 1999 (112) E.L.T. 365 (S.C.) and the judgment of the Supreme Court in the case of Gujarat Ambuja Cements Ltd. v/s. Union of India, 2005(182) E.L.T. 33 (S.C.). The Petitioners in this petition are challenging levy of service tax from the members of the Petitioners-association in relation to the services rendered to the vessels and ships owned by the members of the Petitioners-association outside India from to Article 265 of the Constitution of India lays down that "no tax shall be levied or collected except by authority of law". Therefore, an enquiry that is to be made is whether during the period from to there was valid law which authorises levy of service tax in relation to the services

16 rendered outside India. 13. Service tax was introduced for the first time under Chapter V of Finance Act Section 66 of the Act was the charging section and provided for a levy of service tax at the rate of 5% of the value of the taxable service provided to any person by the persons responsible for collecting the service tax. In other words, the levy was on the provider of the taxable service. "Taxable service" is defined in Section 65 to include only three services namely any service provided to an investor by a stock-borker, to a subscriber by the telegraph authority and to a policy holder by an insurer carrying on general insurance business. Section 68 requires every person providing the taxable service to collect the service tax at the specified rate. Section 69 of the Finance Act 1994 provided for the registration of a person responsible for collecting service tax. Sub-section 2 of Section 5 indicated that it was provider of the service who was responsible for collecting the tax and oblige to get registered. Thus, sections 65, 66, 68 and 69 are pertinent to the present issue. They were subsequently amended. The remaining sections of the 1994 Act substantially continued as originally

17 enacted with minor changes. Under Section 70 of the Finance Act, 1994 every person responsible for collecting service tax must furnish to the Central Excise Officer in the prescribed form and verified in the prescribed manner a clear return. Sections 71, 72, 73 and 74 deal with the filing of the returns, provision for assessment, reopening of assessment and rectification of mistake in assessment order. Section 75 provides for payment of interest at the rate of one and one and half per cent for the every month or part of a month by which the person responsible for collecting service tax delays in paying tax to the credit of the Central Government. Section 76 deals with exemption of the penalty for failure to collect the service tax. Section 77 deals with the penalty for failure to furnish the prescribed return. Section 78 deals with the penalty for suppression the value of the taxable service. Section 79 deals with penalty for failure to comply with notice. Section 94 of the Act empowers the Central Government to make rules for carrying out the provisions for Chapter V of the Act. Pursuant to such powers the Service Tax Rules 1994 were framed. 14. In this petition we are concerned with the

18 provisions of Section 65(105), which defines the taxable service. By that provision a service provided to a ship or vessel was defined to be taxable service. 15. The charge of service tax in respect of service rendered to a ship or vessel remains on the person responsible for collecting the service tax under Section 66 of the Act. Section 66 reads as under:- "66. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub-clause (a), (d), (e), (g), (h), (i), (k), (l), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (y), (z), (za), (zb), (zc),(zd), (zi), (zj), (zk), (zl), (zm), (zn), (zo), (zq), (zr), (zs), (zf), (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk), (zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu), (zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb), (zzzc), (zzzd), (zzze), (zzzf), (zzzg), (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm), (zzzn), (zzzo), (zzzp), (zzzq), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw), (zzzx), (zzzy), (zzzz), (zzzzb), (zzzzc), (zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi) and (zzzzj) of clause (105) of Section 65 and collected in the manner as may be prescribed." Thus, the service tax can be levied at the rate of 12% of the value of the taxable service. Then comes Section 68, which lays down that every person

19 providing taxable service to any person shall collect the service tax at the rate specified in section 66. It is clear from reading of these provisions that according to scheme of the Finance Act, as it existed before , the charge of service tax is on the person who is responsible for collecting the service tax. It is by virtue of the provisions of Section 65 the person who provides the service is regarded as the assessee. 16. Now, so far as the notification dated 1st March, 2002 quoted above which is relied on for justifying levy of service tax from is concerned, perusal of that notification shows that by that notification service which is rendered or provided in the Continental Shelf Exclusive Economic Zone and Territorial Waters of India has been made taxable. That notification does not have the effect of levying service tax on the recipients of the service. Therefore, levy of service tax on the members of the Petitioners-association on the basis of notification dated 1st March, 2002 is plainly without authority of law. 17. Reliance is placed on the provisions of Rule

20 - 20-2(1)(d)(iv) quoted above for justifying the levy of service tax for the period from Perusal of the above quoted Rule 2(d)(iv) shows that by that provision a person liable for paying the service tax was defined to mean in relation to any taxable service provided by a person who is non-resident or is from outside India to a person receiving taxable service in India. Apart from the fact that this rule is contrary to the provisions of Section 68 and other provisions of the Act, under this provision the recipient of the service became liable for paying the service tax provided the service was received in India. The entire case of the Petitioners is in relation to the service received by the vessels and ships owned by the members of the Petitioner-association outside India. Therefore, it cannot be said that on the basis of Rule 2(1)(d)(iv), service tax can be levied on the members of the Petitioners-association. It is further to be seen here that Section 64 gives powers to the Central Government to make rules for carrying out the provisions of the Chapter. The chapter relates to taxing the services which are provided, the taxing on the value of the service and it is only the person who is providing the service can be regarded as an

21 assessee. The rules therefore, cannot be so framed as not to carry the purpose of the Chapter and cannot be conflicted with the provisions in Chapter V of the Act. In other words, as the Act makes the person who is providing the service liable, the provisions in the Rules cannot be made which makes the recipient of the service liable. It is, thus, clear that the provisions of Rule 2(1)(d)(iv) are clearly invalid. 18. So far as reliance placed on the notification dated for justifying levy of service tax from the members of the Petitioners-association is concerned, that notification has been issued under sub-section (2) of Section 68 of the Act. Sub-section 2 of Section 68 reads as under:- 68(2) Notwithstanding anything contained in sub-section (1), in respectof any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service. The above provision authorises the Central Government to notify the taxable service, in relation to which the rules can be framed, in relation to such service.

22 By the notification dated , any taxable service provided by a person who is a non-resident or is from outside India is notified. If Rule 2(d)(iv) is taken to be rule framed pursuant to this provision, then a person who receives taxable service in India from a person who is non-resident or is from outside India becomes taxable and not service rendered outside India by a person who is non-resident or is from outside India. Therefore, levy of service tax from the members of the Petitioners-association from cannot be justified. 19. Then reliance is placed on explanation which is added below Section 65(105). That explanation was added by Finance Act, 2005 with effect from That explanation reads as under:- Explanation- For the removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India, such service shall be deemed to be taxable service for the purposes of this

23 clause. By this explanation services provided by a non-resident outside India to a person residing in India has been declared to be taxable service. Therefore, though the services provided to the members of the Petitioners-Association outside India becomes taxable service, the charge of the tax continues to be on the provider of service as per the scheme of the Act, and because of the explanation also the Respondents do not get authority of law to levy a service tax in relation to the services rendered to the vessels and ships of the members of the Petitioners-association outside India. 20. It appears that a similar provision in the rules was made applicable by the Government in relation to the Clearing Agents by making customers of the Clearing Agent liable for levy of the service tax. That question has been decided by the Supreme Court by its judgment in the case of Laghu Udyog Bharati (supra) and the Supreme Court has clearly laid down that the imposition of the service tax is on the persons rendering the services and by making a provision in the Rules, levy of tax cannot be shifted to the recipients of the services and the Rule framed

24 which brought about this situation has been declared by the Supreme Court to be invalid. The law laid down by the Supreme Court in its judgment in Laghu Udyog (supra) is squarely applicable to Rule 2(1)(d)(iv), which is relied on in this case. It appears that it is first time when the Act was amended and Section 66A was inserted by Finance Act, 2006 w.e.f , the Respondents got legal authority to levy service tax on the recipients of the taxable service. Now, because of the enactment of Section 66A, a person who is resident in India or business in India becomes liable to be levied service tax when he receives service outside India from a person who is non-resident or is from outside India. 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. In that case till Section 66-A was enacted a person liable was the one who rendered the services. In otherwords, it is only after enactment of Section 66-A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a

25 service provider. Before enactment of Section 66-A, there was no such provision in the Act and therefore, the Respondents had no authority to levy service tax on the members of the Petitioners-association. 21. In the result, therefore, the petition succeeds and is allowed. Respondents are restrained from levying service tax from the members of the Petitioners-association for the period from till , in relation to the services received by the vessels and ships of the members of the Petitioners-association outside India, from persons who are non-residents of India and are from outside India. 22. Rule made absolute accordingly. No order as to costs. (D.K.DESHMUKH, J.) (J.P.DEVADHAR, J.)