A. Charging Provision
+ A collective reading of Section 66B read with Section 64 (1) and Section 65B (52) makes it plain that service tax is leviable only on services provided or agreed to be provided in the 'taxable territory'.
+ Such service alone is 'taxable service' which is defined under Section 65B (51) to mean that "any service on which service tax is leviable under Section 66B."
+ The net result is that services rendered outside the taxable territory of India would not be a 'taxable service' for the purposes of the FA. This is of utmost significance since the entire Chapter V applies, in terms of Section 64 (3) of the FA only to "taxable services provided on or after the commencement of this Chapter."
B. Rule making powers - Analysis of Rule 6A
+ A significant change is that Rule 6A brings within its ambit export of even non-taxable services whereas Section 94(2)(f) permits making rules only in respect of 'taxable service'.
+ Rule 6A (1) of the ST Rules creates two problems for the Indian tour operator organising tours for foreign clients. While clauses (a) (b) and (c) are satisfied inasmuch as the tour operator is located in India, the recipient is located outside India, and the service is not included in the negative list under Section 66 D of the FA, clause (d) may not be satisfied where the service provided is a composite one viz., the place of provision of a part of the service is inside India and the remaining part outside India. Thus clause (d) is satisfied, if at all, only in part.
+ The second issue that arises is that such service provided outside India cannot be made amenable to service tax under the FA since it is not a service rendered in the 'taxable territory'.
+ Further sub-rule (2) of Rule 6A states that the central government may by notification grant rebate of service tax or duty paid input services or inputs subject to conditions where there is an export of services. This pre-supposes that such provision of service outside India is in fact amenable to service tax. However, as already noticed, the entire Chapter V of the FA applies only to taxable services and taxable services are those provided in the taxable territory.
+ Even, where in terms of Rule 6A of the ST Rules, the service provided outside India by the Indian tour operator is an 'export of service', under Rule 9 of the PPSR 2012 the place of provision even for such service would be "the location of the service provider" which would make it a service provided in India, when in fact it is not. Thus services provided to a foreign tourist both inside India and outside India are brought within the net of service tax by virtue of the combined operation of Rule 6A (1) and (2) of ST Rules and Rule 9 of the PPSR, 2012.
C. Foreign Trade Policy 2009-2014
+ Para 3.11 talks of 'Services Exports'. General Agreement on Trade in Services (GATS) includes 'tour operator services' which is covered under the sector 'Tourism and Travel Related Services'. If consideration is received in free foreign exchange, these would be considered as service exports. Thus the policy of the Government of India was to encourage export of tour operator services as it earned valuable foreign exchange.
D. Rule 6A is ultra vires Section 94 (2)(f)?
+ Rule 6A of the ST Rules is a piece of delegated legislation. It is a rule made by the Central government in exercise of the powers under Section 94(1) read with Section 94 (2)(f) of the FA.
+ Section 94(2)(f) empowers Central government to make rules for 'determining' when export of 'taxable services' can be said to take place. It does not empower the central government to determine whether there can be an export of non-taxable services viz., services provided outside the taxable territory.
+ Secondly, it does not empower the central government to make rules levying or making amenable the provision of certain services to service tax.
+ Section 94(2)(hhh) also permits making rules regarding the 'date for determination of rate of service tax' and 'place of provision of taxable service'. It does not provide for making rules on determination of taxability of a service.
+ Subjecting certain types of services to tax is an essential legislative function. In this case, since the FA envisages Chapter V applying only to taxable services, bringing non-taxable services within the ambit of service tax is impermissible.
+ The whole of Chapter V applies only to taxable service. If by means of rules under Section 94, what is not taxable under the FA cannot be made taxable, equally they cannot even by rules under Section 93 B.
+ The words 'any other service' occurring in Section 93B is subject to Section 64 (3) of the FA that precedes it. It cannot expand the scope of Chapter V itself. As already noted, this is an essential legislative function and cannot be delegated to the central government.
+ Rule 6A(1)(d) treats even services provided outside the taxable territory i.e. where the place of provision of service is outside India, as an export of 'taxable' service. Since such service by virtue of Section 66B read with Section 65(51) and (52) read with Section 64(1) and (3) of the FA is not amenable to service tax in the first place, and is therefore not 'taxable' service, Rule 6A is ultra vires the FA.
+ Even Section 94(2)(hh) of the FA permits central government to determine when there would be an export of 'taxable service' and not 'non-taxable service.' Something which is impermissible under the FA cannot, by means of the rules made thereunder, be brought within the net of service tax.
+ Since tour operator services are intermediary services and under Rule 9 of the PPSR, 2012 the place of provision of service is the location of the service provider, the package tours service provided by an Indian tour operator to a foreign tourist will, notwithstanding that some part of it is provided outside India, be treated as service provided in India.
+ As a result no Indian tour operator can expect the service rendered by him to a foreign tourist to be considered as an 'export of service' under Rule 6A as he will never be able to meet the requirement of Rule 6A(1)(d) of the ST Rules. Thus under a combination of Rule 6A of the ST Rules and Rule 9 of the PPSR, 2012 something which is non-taxable under the FA is sought to be brought to tax.
+ Since by virtue of Section 64(3) the whole of Chapter V applies only to taxable services, and Section 66 C of the FA falls in that very chapter, the rules made by the central government under Section 66 C has to necessarily be only in relation to taxable services viz., services provided in the taxable territory of India.
+ The legal fiction of treating service rendered outside India to be a service rendered in India cannot be introduced by way of rules. That too would partake the character of an essential legislative function, which cannot be delegated to the central government. In fact such service cannot be brought to tax without amending Section 64 (3) of the FA.
+ Thus not only Rule 6A but even Section 94(2)(f) of the FA would also be unconstitutional if it were to be interpreted to permit determination of even export of non-taxable services not to talk of bringing to tax what is non-taxable under the FA.
E. Clue lies in Goods & Services Tax law
++ Parliament has under the Constitution (One Hundred and First Amendment) Act, 2016 effective 8th September 2016 amended Article 286 (1) to provide that there will be tax on the export of services out of the territory of India. Article 286 (2) of the Constitution of India has been amended simultaneously to provide that Parliament may by law formulate the principles to determine when an export of services takes place in any of the ways mentioned in Article 286 (1). This is another indication that these tasks cannot be delegated to the central government to determine by rules.
F. Taxability of composite services
+ When the service is composite and a payment therefor is charged and made in a lumpsum, it is difficult to make the apportionment of the charges as being towards services rendered in the taxable territory i.e. India and the balance towards those provided outside India.
+ Apart from the fact that the provision for taxing export of services has to be found in the statute itself (and not in the rules) the statute must also provide the machinery by which it can be determined with some certainty how much of the composite service can be said to be rendered in the taxable territory and of what value for the purposes of levy and collection of tax. If there is no such machinery provided, that would be an additional ground of invalidation of the levy itself.
+ The Courts will not ordinarily question legislative wisdom. However, the Courts will strike down delegated legislation that is ultra vires the parent statute. Even a legislative policy has to conform to the Constitution.
++ Rule 6A(1) r/w 6A(2) of the ST Rules, insofar as it seeks to describe export of tour operator services to include non-taxable services provided by tour operators, is ultra vires the FA and in particular Section 94(2)(f) of the FA and is, therefore, invalid.
++ Section 94(2)(f) or (hhh) of the FA does not empower the central government to decide taxability of the tour operator services provided outside the taxable territory.
++ Section 66C of the FA enables the central government only to make rules to determine the place of provision of taxable service but not non-taxable service.
++ Services provided by Indian tour operators to foreign tourists during the period 1st July 2012 to 1st July 2017, which has been paid for in convertible foreign exchange would not be amenable to service tax.
