JANUARY 28, 2014

By Pradeep Jain, CA, Preeti Parihar, CA & Prayushi Jain

THERE has been a hue and cry amongst the travel agents with the inclusion of their services in the ambit of service tax. While switching to negative list era, Export of Services Rules, 2005 have been replaced with rule 6A of the Service Tax Rules, 1994. Now the export of services is to be determined in accordance with this rule read with Place of Provision of Services Rules, 2012. The tour operators providing the services to the foreign nationals earn a huge amount of convertible foreign exchange are not being treated as "exporters" in view of these new service tax provisions. How and why? This piece of writing gives answers.

Rule 6A of Service Tax Rules, 1994:-

Export of service is now governed by rule 6A of Service Tax Rules which states that any service shall be treated as export of service if:-

1. The provider of service is located in taxable territory.

2. The receiver of service is located outside taxable territory.

3. The service is not a specified as service in section 66D of the Act.

4. The place of provision of service is outside India

5. The payment for such service has been received by the service provider of service in convertible foreign exchange, and

6. The provider of service and receiver of service are not merely establishments of distinct person in accordance with item (b) of explanation 3 of clause (44) of section 65B of the Act.

Thus, according to this rule, if all of the above six conditions are satisfied the service will be treated as "export of service" and accordingly no service tax would be levied. The condition no. (4) above states that the "place of provision of service" should be outside India. The place of provision of service shall be determined in accordance with the "Place of Provision of Service Rules, 2012".

Place of Provision of Services Rules, 2012:-

These rules provide separate rules for determining the place of provision of service in different cases. The instant case of tour operators is covered under rule 9 of Place of Provision Rules, 2012. Rule 9 provides that the place of providing of service will be deemed as location of service provider in case of services specified under this rule. This rule reads as follows:-

"Place of provision of specified services.-The place of provision of following services shall be the location of the service provider:-

a. Services provided by a banking company, or a financial institution, or a nonbanking financial company, to account holders;

b. Telecommunication services provided to subscribers;

c. Online information and database access or retrieval services;

d. Intermediary services;

e. Service consisting of hiring of means of transport, upto a period of one month.

The rule 9 includes the "intermediary services" in the list of specified services on which this rule applies. The term "intermediary services" is explained in Guidance Note 3 issued by TRU as follows:-

An "intermediary" is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two supplies at any one time:

i) The supply between the principal and the third party; and

ii) The supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

For the purpose of this rule, an intermediary in respect of goods (commission agent i.e. a buying or selling agent) is excluded by definition. In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered:-

Nature and value : An intermediary cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back to the principal.

Separation of value : The value of an intermediary's service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as "commission".

Identity and title : The service provided by the intermediary on behalf of the principal is clearly identifiable.

In accordance with the above guiding principles, services provided by the following persons will qualify as ‘intermediary services':-

i) Travel Agent (any mode of travel)

ii) Tour Operator

iii) Stockbroker

iv) Commission agent [an agent for buying or selling of goods is excluded]

v) Recovery Agent

Even in other cases, wherever a provider of any service acts as an agent for another person, as identified by the guiding principles outlined above, this rule will apply.

Thus, the services provided by Tour Operator have been specifically treated as "Intermediary services" in the Education Guide issued by TRU. Thus, the place of provision of service shall be determined in accordance with rule 9 of these rules. Therefore, the place of the service would be Location of service provider i.e. India.

Analysis of Tour operator services in view of rule 6A & rule 9 of Place of Provision of Services Rules, 2012:-

In view of above referred rule 6A and rule 9 ibid, we shall now check whether the Tour Operator services provided to foreign nationals can be treated as export of service or not. These conditions w.r.t. tour operator services are discussed as follows:-

The analysis of above table makes it amply clear that the condition no. (4) above is not satisfied by virtue of rule 9 of the Place of Provision of Services Rules, 2012. Thus, tour operator's service does not qualify as export of service even after fulfilling all the conditions except one. Resultantly, service provided by tour operators to foreign nationals against consideration in foreign exchange, is also liable to service tax.

Recent Developments:-

A Writ petition has been filed by Indian Association of Tour Operators challenging the validity of rule 6A of the Service Tax Rules, 1994. Earlier, the Association had approached the Ministry of Finance seeking the benefit of export of service to the "tour operators" engaged in providing services to the foreign nationals against convertible foreign exchange. Representation was also made to the Ministry of Commerce and Industry regarding the "export of services" highlighting that there is no clarity in the principle of defining "export of services" in India, which is leading to a lot of problems and litigations. However, since no response was received from there, Writ petition was filed by the Association.

Is it intentional or a drafting error?

Definitely, the existing position of law is merely a drafting error. This cannot be the intention of government by any stretch of imagination as no government will put its foreign exchange generating industry into danger. It is worth mentioning here that as per experts, there is tough competition in this area and if it is burdened with service tax, it will cause a shutdown of business of a number of tour operators. Alongwith it, levying service tax on the services of tour operators will make the Indian tourism an expensive one as compared to neighbouring countries, substantially affecting the preferences of tourists. In pre-negative list era, Export of Service Rules, 2005 had divided the entire taxable services into three parts, and rule treating the same as export was specifically framed looking to the nature of service category. While shifting to negative list, the classification concept has been done away and a common rule 6A and Place of Provision of Service Rules, 2012 have been framed which seems to not have taken care of specific situations like dealt herein. Thus, there remains a lacuna which is the root of this problem.