MARCH 08, 2019

By Devinder Bagia and Raghav Khurana

UNDER the Foreign Trade Policy (FTP) 2009-14, the 'Served from India Scheme' ('SFIS') turned out to be a contentious scheme for many service providers operating from India. One of the major issues which led to the present scheme was the dispute relating to eligibility of Indian service providers providing services using a foreign brand.[Yum Restaurants - 2015-TIOL-225-HC-DEL-CUS, Shri Naman Hotels & Ors. - 2015-TIOL-2090-HC-MUM-EXIM & Cummins Technologies India Pvt. Ltd. vs. Union of India and Ors ' - SLP (C) No. 28830/2017]

In this article, we highlight the disputes under the Services Exports from India (SEIS) Scheme, especially highlighting the restrictions imposed as compared to the earlier scheme.

THE SERVICE EXPORTS FROM INDIA SCHEME (SEIS)

Under the FTP 2015-20, the Central Government replaced the “SFIS” and introduced the SEIS Scheme. The objective of the SEIS is to encourage and maximise export of notified Services from India. The rewards under the SEIS shall be duty credit scrips which shall be freely transferrable.

Eligibe Services under the SEIS

Para 3.08 of the FTP lists down the eligibility criteria for the SEIS.

- Para 3.08 (a) provides that Service Providers of notified services, located in India , shall be rewarded under the SEIS. Further, the Para provides that only Services rendered in the manner as per Para 9.51 (i) and Para 9.51 (ii) of the FTP shall be eligible for the SEIS benefits. The said notified services have been listed down under Appendix 3D to the FTP.

- It is pertinent to note that in terms of Para 9.51 (i) and (ii) of the FTP, “Service Provider” means a person providing supply of a service from India in any other country (cross-border trade) and supply of a service from India to service consumers of any other country in India (consumption abroad) respectively. Thus, only if the services are provided in the aforesaid modes, the service providers shall be eligible to claim the SEIS benefits.

- In addition, Para 3.08 (c) of the FTP provides that the payments received in INR for service charges earned on specified services shall be treated as receipt in deemed foreign exchange ('FE') as per the guidelines of the Reserve Bank of India ('RBI'). The list of such services is provided for under Appendix 3E.

Thus, to summarize, the following specific services when provided by a service provider located in India in the manner as listed down under 9.51 (i) and (ii)are eligible for the benefit of SEIS: -

(a) Services notified down under Appendix 3D (against receipts in free FE) [ Para 3.08 (a)]

(b) Services notified down under Appendix 3E (against receipts in INR deemed as FE) [ Para 3.08 (c)]

Appendix 3D: List of eligible services [Para 3.08 (a)]

Appendix 3D lists down the list of services eligible under the SEIS and the rates of rewards against them. The list of services listed down under the said Appendix are Business Services, Communication Services, Construction and Related Engineering Services, Educational Services, Environmental Services, Health-Related and Social Services, Tourism and Travel-related services, recreational, cultural and sporting services and Transport Services.

Appendix 3E: List of eligible services [Para 3.08 (c)]

It may be noted that the earlier SFIS scheme had no such separate Appendix and all services for which payments were received in INR but which were otherwise deemed as receipt in FE as per the RBI guidelines were eligible for SFIS benefit (Reference: Para 3.12.2 read with para 9.53 (iv) of FTP 2009-14). There were many service exporters from India which were hitherto availing the said benefit.

Under the new scheme, the preamble to Appendix 3E has the potential to become another bone of contention between the services exporters (albeit 'Indian service exporters' this time) and the Department. It provides that only those services rendered in Customs Notified Areasto a foreign liner (or procured by a foreign entity in case of services included in rental of vessels with crew), where ' payments which have been received in FE or which would have been otherwise received in FE, but paid in INR, including through its agents in India out of the amount remittable to the overseas principal, or out of remittances to be sent by the overseas buyer, would be considered as deemed to be received in FE and shall be eligible for issuing rewards under the SEIS.For instance, an exporter from India may engage a foreign liner through its agent in India for shipment of goods. In course of such export, the agent may in turn avail services from many service providers who would be paid for their services by the said agent before remitting the balance amounts to the principal foreign liner. In such a case, all services provided in the 'Customs Notified Area' to the agent / foreign liner are eligible for SEIS even if the money is paid by the agent to such service providers in INR.

The said Appendix3E is divided into the three broad headings, - Maritime Transport services, Air Transport Services and Ground handling. 'Maritime Transport services' has been further sub-categorized into 4 major heads which in turn has a total of 56 minor-heads of services. On the other hand, the 'Air Transport Services' and 'Ground handling' has not been further sub-categorized. In this context, it is again relevant to note that the Appendix 3D has a Serial No. 9 which reads 'Transport Services' which is further sub-categorized into 4 major heads, namely, Maritime Transport services, Air Transport Services, Road Transport services and Services auxiliary to all modes of transport. Hence, services covered under Appendix E form only a part of those covered under Serial No. 9 of Appendix 3D. Another noticeable feature in Appendix 3E is the type and nature of services specified under the 'Supporting services for maritime transport' which is listed at sub-serial no (f) of 'Maritime Transport services'.

Thus, Appendix 3E intends to cover only those services: -

(a) Rendered in a Customs Notified Areas.

(b) To a foreign liner / its agent (or procured by a foreign entity in case of services included in rental of vessels with crew).

(c) For which payments have been received in FE or which would have been otherwise in received in FE, but paid in INR, would be considered as deemed to be received in FE.

(d) In the context of Maritime Transport services, only specifically listed services pertaining to Maritime Transport are covered under Appendix 3E unlike S. No. 9 of Appendix 3D which may cover a broad range of support services for maritime transport.

It is pertinent to note that the said SEIS Scheme,particularly Appendix 3E, has raised many doubts amongst the service providers in the maritime industry to claim benefits.Some of the current issues being faced are highlighted as under:

Services rendered in Customs Notified Area – Ambiguity regarding what constitutes a Customs notified area

It may be noted that there is no definition of "Customs Notified Area" either under the FTP or the Customs Act, 1962 ('Customs Act').Reference can be drawn to the definition of 'customs area' under Section 2 (11) of the Customs Act which provides that the customs area means the area of a customs station or a warehouse and includes any area in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities. A 'customs station' in turn has been defined to mean a 'customs port', 'customs airport', 'international courier terminal', 'foreign post office' or 'land customs station' which are all notified in the Official Gazette by the Board in terms of powers conferred under various sub-clauses of section 7 of the Customs Act. It may also be of interest to note that after the Board notifies any port in terms of section 7, the concerned Commissioner/ Principal Commissioner of that port specifies the limits of the 'customs area' within that port in terms of power conferred under Section 8.

In the course of maritime export / import, there are a host of supporting services provide by various service providers which may not be, strictly speaking, performing their part of activity in an area notified by the Board (section 7) / Commissioner (section 8), for instance, a custodian working in a customs notified area may also be engaged in providing inland haulage services (inland transport) of goods from gateway port / CFS to Inland Container Depots (ICD) located in the hinterland. Can it be said that the services beginning and ending in customs notified area (both gateway port / ICD are notified under section 7) are provided in the Customs notified areas even if the rail passes through a non-notified area in between the two notified areas? Again, can it be said that because the entire transport happens in Customs bond, the services are provided in customs notified area? Is the requirement of services physically being rendered in customs notified area sacrosanct as per the opening para of Appendix 3E or can be said that the sub-entries like 'cargo dispatch services' and 'inland transportation services' may cover such services? There is no clarity as of now to these and other questions which concern the 'Customs Notified Area'.

Restricted scope of deemed foreign exchange

Unlike, the previous SFIS policy, there is no such provision in SEIS of providing services in the manner as laid down under 9.51 (i) and 9.51 (ii). All the 4 modes provided under the definition of Service provider (para 9.53) were covered under the previous policy:-

(i) supply of a service from India to any other country;

(ii) Supply of a service from India to service consumer of any other country in India;

(iii) Supply of a service from India through commercial or physical presence in territory of any other country.

(iv) Supply of a service in India relating to exports paid in FE or in INR which are otherwise considered as having been paid in free FE by RBI.

The stark difference under the current policy has been specific inclusion of only the first two modes of service under the SEIS scheme.

While, under the previous policy where any service where payments relating to exports paid in FE or in INR which are otherwise considered as having been paid in free FE by RBI qualified for the benefit of SFIS. In contrast, under the present policy only those services listed in Appendix 3E are eligible for such benefit, subject to fulfilment of other requirements (provision of service in Customs Notified Area and provision of service to a foreign liner).

It may also be noted many exporters were getting the benefit for provision of the same services under the SFIS in terms of the FTP 2009-14. Under the erstwhile policy, the SFIS benefit was available to Indian Service Providers who were providing services as listed down under Appendix 41 of the FTP 2009-14. For example, a service provider providing in cargo brokerage services for import cargo or freight agency services was eligible to claim SFIS benefit under the category “supporting services for maritime transport” or “freight transport agency services” respectively.

Under the SEIS, the category of “supporting services for maritime transport” does not include cargo brokerage services for import cargo but includes only “cargo brokerage services for export cargo”. Similarly, freight transport agency services have been now placed only under Appendix 3D and not under Appendix 3E. Therefore, it may happen in cases, that the service providers who were earning foreign exchange and providing services from India to foreign service recipients may now be out of the ambit of the SEIS. In other words, the service provider would have been eligible for the benefits under the SFIS, similar benefits may not be available to him under the SEIS.

Conclusion

To summarize, under the present policy, due to the change in the scheme and a lack of clarity, the exporters could face following issues while claiming SEIS benefits: -

(a) The Provision of service in 'Customs Notified Area'. Since there is no definition of a Customs Notified Area either under the FTP, HBP or the Customs Act, there is a lack of clarity as to when a service can be said to be have been provided under a Customs Notified Area.

(b) The scope of provision of certain services such as 'Internal Transportation Services' and 'Cargo Dispatch Services' within a Customs Notified Area is unclear and full of uncertainties.

(c) Few exporters who were availing the benefit under the SFIS when payments were received in INR (deemed FE) can now be denied the benefit considering that said mode is now limited to services provided for only under Appendix 3E.

(d) Only for services provided to a foreign liner and received in INR through the agent are now covered under the FTP.

In the interest of the exporters/ service providers, it would be beneficial if the DGFT issues a clarification on these issues. This would help the industry to evaluate in advance whether they are eligible for the benefit of the SEIS instead of being on tenterhooks. It may be noted that the time limit for applying for SFIS (without any late cut) for the FY 2017-18 expires on 31.03.2019 . Hence, an early clarification from the Government would bring relief and clarity.

(The authors are Joint Partner and Senior Associate, Lakshmikumaran & Sridharan, New Delhi and the views expressed are strictly personal.)