MARCH 4, 2010

Change in Export of Services Rules, 2005 – Has Budget provided permanent solution?

By Ravikumar Yanamandra, Manager

THE recent Budget change of removal of the condition ‘provision of service from India and usage outside India' is indeed a laudable effort from the Ministry of Finance to put at rest the disputes long pending in this area. This to many means that from now onwards, there is no necessity for export service providers to prove the usage of service outside India. It only remains to be proved that the asset / place of performance of service / recipient of service is located outside India coupled with the receipt of consideration in convertible foreign exchange, to justify the export of services. This amendment also seems to be a fallout of the recent Microsoft Judgment (stay matter, where Microsoft's argument of proving certain services was, prima facie, not held to be correct). While the intention of the ministry is to provide relief to the industry in reducing disputes such as Microsoft, a deep look into the existing provisions, after amendment, also portrays a picture which is still short of clarity expected. The reasons for the same are explained as below:

Consider the case of Microsoft only where services in the nature of promotion or marketing of goods is undertaken by the Indian Subsidiary on behalf of the Foreign Holding company. The following excerpts can be noticed in the CESTAT Judgment in arriving at the prima facie conclusion that the services do not amount to export of services:

++   Prima facie , it appears that the ultimate outcome of provision of services reached to the consumers in India and that were ultimately meant to be consumed in India.

++   The service provided in India was consumed without reverting back to foreign principals for consumption abroad. Ultimate outcome of service having been exhausted in India, there appears to be no export of such services since efforts in India generated service recipients in India only.

++   But the present case of the appellant does not seem to be so when the consumers of services provided were in India only and even the contents of sample agreement dated 01.07.2005 establishes in substance that ultimate consumption of service was in India and the appellant was an intermediary to connect its foreign principal to the end user of service who are consumers in India.

++   I consider relevant to mention that a distinction must be drawn amongst the words "user", "beneficiary" and "buyer" of a service. While many a times they are same, they may not be so in all the cases (Excerpt from the Commissioner's Order in case of Microsoft).

A look at all the aforementioned points clearly lay down that the dispute do not only pertain to the fact that the services were used in India but also the fact that the services were in fact provided to the customers in India. While this seems to be the case, let us now look at the amendment that has been carried out in the Budget 2010, as explained above. In the case of promotion or marketing services, where essentially the services are carried out in India, the question still remains to be seen is that where is the service recipient located. This question, as of now still seems to be unanswered, as in a case where services are not provided one to one, it is necessary to have a clear cut guidance as to whom of the following would be a service recipient in a given case:

++   Person entering into the contract with the service provider

++   Person paying the consideration to the service provider

++   Person to whom the services are provided

++   Person who derives the benefit out of services provided.

While to many this may seem hypothetical, there are in fact live cases which still need to be examined in light of the contractual arrangements entered into with between the parties. In a complex case, all the four above parties may be different. This poses a problem to the service recipient to justify who is the service recipient in a given set of facts. The common and simple approach seems to be that the recipient of service is always the person with whom the contract is entered. However, as could be noticed from the excerpts given from the Microsoft judgment, the phrases ‘user,' ‘beneficiary' and buyer of services can be different in different set of facts. Accordingly, what is perceived to be a change setting aside the pending issues in case of export of services, still does not seem to set aside all the pending issues as the Department can still raise the issue of who is the service recipient, the justification of which still seems to be clearly devoid of any judicial precedents or clarifications.

(The author is associated with Deloitte Haskins & Sells)