This provision is effective after statutory changes since April 18, 2006
Times change, and with that changes business throughout the globe. The past two decades have seen immense change in trade practices, and with modern communication network, things are available with the click of the mouse.
However, one thing has not changed - the system of middleman. Companies are not able to dispense with them. Today, to attract global buyers, many companies engage commission agents in foreign countries on commission basis.
This has given rise to a question related to Service Tax - whether commission paid to agents who are working abroad shall be treated as import of services and whether as per "Reverse Charge Mechanism" the Indian service recipient is to be made liable for tax payment? Is the Indian company importing services of these commission agents?
The answer is not simple. In past few years, this question has given rise to hundreds of litigations. Before the enactment of Section 66A of the Finance Act, 1994, there was no provision under Service Tax law that could tax the services provided outside India to the person in India.
First, we need to understand what is "Reverse Charge Mechanism"? Normally, a service provider is liable to pay Service Tax, but in case a person in India receives service from a person outside India, then the recipient will be treated as provider and will be held liable for payment of Service Tax.
According to the statutory provisions of Section 66A (inserted w.e.f. 18.04.2006), any service (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 who has his place of business, fixed establishment, permanent address or usual place of residence, in India, is taxable for the purposes of this section.
Moreover, such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly the recipient shall pay the service tax.
However, there are some relaxations to service importers, listed as follows:
Individual + Not for business or commerce - Where the recipient of the service is an individual and the service received by him is used otherwise than for business or commerce, he is not liable to pay Service Tax vide reverse charge.
Location from where services is provided - When provider of service has his business establishments in more than one country, then the country having the establishment from where the service is provided, shall be treated as the country from which service is provided.
To illustrate, if ABC Ltd. has establishments in India, China and Australia, and the service is provided from Australia to XYZ Ltd. in India, Australia will be treated as the country of provision of service even though ABC has one establishment in India.
Single person having separate permanent establishment - 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 illustration, if XYZ Ltd. is having one permanent establishment in India which receives service from another permanent establishment of XYZ Ltd. in Canada, then the two permanent establishments shall be treated as separate entities even though they belong to XYZ Ltd. The permanent establishment in India will be liable to pay Service Tax as a recipient of service.
However, clarity in the matter came about after the effective levy of Service Tax on import of services started with the introduction of the change in Section 66A. For the period before 18.04.2006, the question whether commission paid to foreign agents will be taxed under Service Tax or not, kept coming at various adjudication levels. Then the matter was put to test as well as rest, by the Supreme Court in the case of Indian National Ship Owners (STO 2009 SC 72).
The Supreme Court affirmed the Bombay high court decision of the same party (STO 2009 Bom 78), wherein it was held that the recipient of service who is in India is liable for Service Tax only after 18.04.2006, as statutory provision was absent earlier. The same point was taken up in Unitech Ltd. (STO 2009 Del 877) where it was held that revenue agencies can collect tax only upon being invested with due legal authority, which was given only with insertion of Section 66A.
CBEC vide its circular dated 19.4.2006 clarified that the treatment of the recipient of service as the deemed service provider under Section 66A is only for the purpose of charging Service Tax on taxable services received from outside the country. Services provided from outside India and received in India are, therefore, not treated as taxable service provided by the recipient for the purpose of Cenvat Credit Rules, 2004. However, where such service is used as an input for providing any taxable output, the Service Tax paid on such service can be taken as input credit.
Thus, we can say that before 18.04.2006 the commission paid to foreign agents will not be taxed on the basis of reverse charge mechanism. However, in the current scenario the same has to be dealt as per the provisions of Section 66A read with Import of Services rules.
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