As per the charging section 66B of the Finance Act, 1994, (the “Act”) Service Tax shall be levied on Services which are provided or agreed to be provided in the 'taxable territory'. 'Taxable territory' has been defined as the whole of India except the State of Jammu and Kashmir. In order to determine whether services have been provided in the taxable territory, the Place of Provision of Services Rules, 2012 (the “PoP Rules”) have been framed in the exercise of powers conferred by sub–section (1) of section 66C of the Act.
A. General Outline of PoP Rules
Under the POP Rules, there are ten rules (Rule 3 to Rule 12) which determine the place of provisions of service. The same can be classified in two broad categories of Rules applicable generally and rules applicable to certain specific services.
The general rule for determination of Place of Provision of services is provided in Rule 3 whereas Rule 4 to Rule 12 determines the Place of Provision for the provision of certain specific services which includes the following services:
- Performance based services (Rule 4)
- Services relating to immovable property (Rule 5)
- Services relating to events (Rule 6)
- Services provided at more than one location (Rule 7)
- Services where provider and recipient are located in taxable territory (Rule 8)
- Specified services (Rule 9)
- Goods transportation services (Rule 10)
- Passenger transportation service (Rule 11)
- Services provided on board a conveyance (Rule 12)
The order of application of all the rules under POP Rules has been specified in Rule 14 which states that whenever a service is not covered under one of the subsequent rules (Rule 4 to Rule 12), it is consequently covered under Rule 3 (i.e.general rule).
B. Rule Applicable Generally – Rule 3
As per Rule 3 of POP Rules, the location of service receiver would be place of provision of services. The terms “location of service receiver” and “location of service provider” is provided under Rule 2 of the POP Rules. For eg. a consultancy firm situated in India has provided a consultancy to UK based company, then the place of provision will be UK i.e. non–taxable territory.
Thus, in such case no service tax would be leviable. Further, as per proviso to Rule 3, where the location of service receiver is not available in the ordinary course of business, the place of provision shall be the location of service provider.
C. Performance based services - Rule 4:
The place of provision for the following services is the place where services are actually performed: a) Services that are performed on goods made physically available by the recipient to service provider/ person acting on his behalf. For example, if goods are sent to London by the service receiver for testing in a laboratory, then the place of provision will be London. Therefore, no service tax is leviable in this case as the service has been provided in a non–taxable territory i.e. London.
Further, as per the proviso of the Rule 4 (a), where 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. For example a Germany based engineer has installed software by accessing Laptop of a person sitting in Delhi, the POP shall be the Delhi. The said service would be leviable to service tax and service recipient would be liable to pay service tax under reverse charge.
Second proviso to Rule 4 also provides that this rule shall not apply in case of service provided in respect of goods that are temporarily imported into India for repairs and are exported after repair without being put to any use in the taxable territory.
For example a Germany based company has sent a Laptop physically in India for repair. In such case Rule 3 would apply (and not rule 4), provided the Laptop is exported outside India after repair.
b) Services that are provided to an individual, represented as service recipient / person acting on his behalf which requires physical presence of the said individual for provision of service.
For example, beauty treatment services, personal security services, health and fitness services, photography services, etc. As an illustration, if an Indian company has sent its employees to France for training then the place of provision of this service will be France i.e. a non–taxable territory. Thus, no service tax will be levied on such training services.
D. Services relating to immovable property – Rule 5
The place of provision of service relating to the immovable property is the place where immovable property is located or intended to be located. Certain services have been illustrated in Rule 5 such as services of real estate agents, architects etc.
For example if an Indian based Architect has prepared a design for a China based Company for construction of its new Building at China, in such case the place of provision will be the location where building is to be constructed i.e. China.
E. Services relating to events – Rule 6
The place of provision of service relating to events will be the place where the event is actually held. To illustrate, a foreign company located in USA intends to organize a conference in Mumbai for budding businessmen. Thus, consideration charged by the US based Company as registration fee for participation will be taxable in India.
F. Services provided at more than one location – Rule 7
This Rule states that where any service referred in Rule 4,5 or 6 is provided at more than one location, and one of the locations is in a taxable territory, the place of provision shall be the location in the taxable territory where the greatest proportion of service is provided – meaning thereby that whole consideration would be taxable in India.
Here it may be noted that irrespective of the fact that in cases where major portion of the service provided outside the taxable territory, place of provision shall be taxable territory if any portion of such service has been provided in taxable territory. As per an illustration as provided in Education Guide, 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 proportion of service is provided, in this case Kerala.
It is important to note that the insignificant portion of a service rendered in any part of the taxable territory which is not by way of service actually performed on goods like mere issue of invoice, processing of purchase order or recovery are not covered under this provision.
G. Services where provider and recipient are located in taxable territory – Rule 8
The place of provision of a service, which is provided by a provider located in the taxable territory to a receiver who is also in the taxable territory, will be the location of the receiver. Therefore, in case the location of Service Provider and Recipient is a taxable territory then irrespective of any foregoing Rule i.e. Rule 4, 5, 6 the PoP shall be location of Service Recipient. For instance, Service Recipient A and Service Provider B have entered into a contractual arrangement to provide
Architect services in relation to construction of a laboratory in New York and both A & B are located in a taxable territory, then such service shall be leviable to Service Tax in India irrespective of the fact that the immovable property intended to be located in New York.
H. Specified services – Rule 9
The place of provision for these specified services shall be the location of service provider:
i. Services provided to accounts holders by a banking company/ financial institutions/ Non – banking financial institutions.
For eg. Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing, banker to an issue service etc. 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 general rule i.e. the Main Rule 3.
ii. Online information and database access or retrieval services. For eg. if a service receiver A, located in Delhi pays subscription charges to access some data available on a website of service provider B, located in London, then the same shall not be leviable to tax as the place of provision is London, i.e. non–taxable territory.
iii. Intermediary services Intermediary services are when a broker, an agent or any other person who arranges or facilitates provision of services or sale of goods between two or more persons. For eg. Commission Agent (“C”) for sale of goods by “A” to “B”.
iv. Service consisting of hiring of means of transport except aircrafts, and vessels (excluding yachts) upto a period of one month. For eg. if service provider located in Jammu & Kashmir has given on hiring a fleet of cars to a company located in Delhi on an annual contract. The place of provision of service will be determined in terms of Rule 3 because this Rule covers situations where the hiring is for a period of upto one month.
I. Goods transportation services – Rule 10, PoP Rules
Any service of transportation of goods, by any mode of transport (air, vessel, rail or by a goods transportation agency (“GTA”)) except by courier or mail, is covered under this rule. Place of provision for such service shall be the place of destination of goods. However, in case of services provided by a GTA the place of provision shall be the location of the person liable to pay tax. For eg. A consignment of certain goods is consigned from Mumbai to Amsterdam.
The place of provision of goods transportation service will be Amsterdam (outside India, hence not liable to service tax). Conversely, if another consignment is consigned from Paris to New Delhi, the place of provision will be New Delhi. Let us also consider other instances for clear view on place of provision of service for GTA:
J. Passenger transportation service – Rule 11
The place of provision with respect to passenger transport services is place where the passenger embarks on the conveyance for a continuous journey. Continuous journey has been defined in the Rules as journey for which a single ticket has been issued for the entire journey; or more than one ticket or invoice has been issued for the journey with no scheduled stopover in the journey. Further “Stopover” means a place where a passenger can stop 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.
K. Services provided on board a conveyance – Rule 12
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. For eg. if a movie on demand 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).
These Rules have to be considered to ascertain international transactions. 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. These rules will be equally relevant for determining services that are wholly consumed within a SEZ, to avail the outright exemption. Further, they will also be applicable for those who have operations with suppliers or customers in the state of Jammu and Kashmir.