MARCH 3, 2010

‘India' in Export of Service Rules and Import of Service Rules and its ‘probable implications'

By Santosh Hatwar

THROUGH Notification 6/2010-ST dated February 27, 2010, Rule 3 of Export of Service Rules, 2005 was amended. One significant amendment was to omit clause (a) of sub-rule (2) of Rule 3. Prior to this omission, clause (a) of sub-rule 2 of Rule 3 ibid read as follows:

“Such service is provided from India and used outside India”.

Prior to March 1, 2007 this was “delivered outside India and used outside India”.

Services being intangible, there was considerable confusion in interpreting these two phrases pre and post March 2007, resulting in a significant increase in litigation on this front. After wasting considerable time and resources, the Government has now decided to do away with clause (a) ibid altogether.

It remains to be seen if the department will view ‘export of services' with an open mind after this amendment. This coupled with some significant changes in Notification 5/2006-CE dated March 14, 2006 as amended, the refund claims from the services sector should get resolved positively.

The other amendment was to substitute the explanation in Rule 3 ibid which defined ‘India' for the purpose of this Rule. The substituted explanation reads as follows:

‘Explanation.- For the purposes of this rule “India” includes the installations structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof.”

A similar definition of ‘India' was incorporated by way of substitution in Rule 2(e) of The Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 [‘Import of Service Rules, 2006'] vide amending Notification No. 16/2010-ST dated February 27, 2010.

Further, vide Notification 14/2010-ST dated February 27, 2010 the provisions of Chapter V of the Finance Act, 1994 are extended to the areas specified in column 2 of the table below, in the continental shelf and the exclusive economic zone of India for the purposes specified in column (3) of the said table. With this the existing Notification 1/2002-ST dated March 1, 2002 stands superseded.

TABLE

How significant are these amendments for exporters / importers of services and also for the service providers in India vis-à-vis the continental shelf and the exclusive economic zone of India?

Since the definition of ‘India' was already amended last year to include installations, structures and vessels in the entire continental shelf and the exclusive economic zone of India, in Import of Service Rules, 2006 and the provisions of Chapter V of Finance Act, 1994 were already extended to these areas, the changes brought in this year is in the form of specifying that only those installations, structures and vessels located in the continental shelf and the exclusive economic zone of India which are meant for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof would be regarded as ‘India' in Export of Service Rules, 2005 and Import of Service Rules, 2006.

The amended definition of ‘India' in Export of Service Rules, 2005 and Import of Service Rules, 2006 may not be applicable if any taxable service is consumed by a recipient who is engaged in any other activity (other than prospecting or extraction or production of mineral oil and natural gas from the installations, structures and vessels in the continental shelf and the exclusive economic zone of India) undertaken in the continental shelf and the exclusive economic zone of India.

So any taxable service if provided to such other activities would still be regarded as ‘export of service' if it is provided by service providers from India to the recipients in the continental shelf and the exclusive economic zone of India and would not be regarded as ‘import of service' if the recipient who is engaged in such other activities in the continental shelf and exclusive economic zone receives the taxable services from outside India (even if the recipient fulfils the requirement of Section 66A(1)(b) of the Finance Act, 1994, because the said areas where services are received from outside ‘India' fall outside the purview of ‘India' as defined in the Import of Service Rules, 2006).

One may wonder as to what other activity may be undertaken in the continental shelf and the exclusive economic zone of India other than prospecting or extraction or production of mineral oil and natural gas from the installations, structures and vessels in those areas.

It must be noted that the continental shelf and the exclusive economic zone of India is not only a repository of mineral oil and natural gas, it is speculated that there are huge deposits of heavy minerals like ilmenite (a primary ore of titanium), rutile (an ore of titanium), zircon (used as a semi-precious stone, also used as abrasive, insulating material, refractory material), sillimanite (sillimanite refractories are used in industries like cement, ceramics, glass-making, metal smelting, refinery and treatment, tar distillation, coal carbonisation, chemicals manufacture, iron foundries), sulphides of zinc, copper, iron, silver, cobalt and gold amongst others. In addition to this these areas are also rich in living resources like fishes, crustaceans, molluscs and various other flora and fauna.

These living and non-living resources can be commercially exploited for which taxable services could be consumed or provided depending on the nature of activity undertaken by the recipients or service providers respectively in the continental shelf and the exclusive economic zone of India.

However, by virtue of the above mentioned amendments to the definition of ‘India' in Export of Service Rules, 2005 and Import of Service Rules, 2006, these services would either be regarded as ‘export of service' or would be out of the purview of ‘import of service' depending on how the service providers/recipients are placed vis-à-vis continental shelf and the exclusive economic zone of India, which has implications, whether good or bad, for both the department and the recipients/service providers.

Therefore, by coming up with such a restricted usage of the definition of ‘India' in both Export of Service Rules, 2005 and the Import of Service Rules, 2006, it remains to be seen how the Government will deal with the potential leakage of revenue.