Service Tax on foreign tourists operator services held ultra vires the Finance Act

Service Tax on foreign tourists operator services held ultra vires the Finance Act insofar as export of tour operator services include non-taxable services provided by tour operators.

The High Court refuses to award prospective overruling so that the central government does not have to refund the service tax collected on the services provided by Indian tour operators to foreign tourists. 

 Service Tax on foreign tourists operator services

ABCAUS Case Law Citation:
ABCAUS 2050 (2017) (08) HC

 The Grievance:
The Writ Petition in question sought a declaration that Rule 6A of the Service Tax Rules, 1994 (‘ST Rules’), concerning ‘Export of services’ is ultra vires the Finance Act 1994 (‘FA’). The validity of Section 94 2 (f) of the Finance Act (FA) was also challenged on the ground that it gives unguided and uncontrolled power to the central government to frame rules regarding ‘provisions for determining export of taxable services’

Brief Facts of the Case:
The writ petition was filed by the Indian Association of Tour Operators. Prior to insertion of Section 6A of the ST Rules with effect from 1st July 2012 tour operator services provided to foreign tourists was treated as ‘Export of services’ and exempted from the levy of service. However after 1st July 2012 service tax @ 3.09% was charged on the cost of services provided by the Indian tour operators to foreign tourists.  

Contention of the Petitioners:
It was submitted that there was an anomalous situation where provision of package tour services to foreign tourists outside India, in the neighbouring countries, were also sought to be taxed in India.

The main thrust of the submissions was that Rule 6A suffers from the vice of excessive delegation. This is because as non-taxable services such as services provided outside the taxable territory to foreign tourists, are sought to be brought within the ambit of service tax. Rule 6A is assailed as being ultra vires the FA

It was submitted that that as a result of having to pay service tax, which had to be passed on to the customers i.e. foreign tourists, the Indian tour operators were losing business to their foreign counterparts. It was further contended that Rule 6A was arbitrary, discriminatory and violative of Articles 14 and 19 (1) (g) of the Constitution of India.

Observations made by the High Court:
The High Court observed that with the introduction of GST regime with effect from 1st July 2017, the provisions of the earlier FA and the rules thereunder stand repealed. Therefore the Court confined the subject of the writ to the legal position as it existed prior to 1st July 2017

It was noted that prior to 1st July 2012, as far as export of tour operator services was that even if a part thereof was performed outside India and the remaining in India, it would still be treated as having been performed outside India and thereby be construed as an export of service. Such export of tour operator service was not exigible to service tax. This position continued till 1st July 2012.

The High Court  observed that Rule 6A of the ST Rules is a piece of delegated of 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. The grounds on which delegated legislation can be challenged are well-settled.

It was noted that as held by the Supreme Court, an essential legislative function cannot be delegated to the executive. It has to be exercised by the legislature.

The High Court  observed that the question to be answered was whether the levy of tax on services is an essential legislative function that cannot be delegated? The Court opined that the answer perhaps lies in the language of Section 94 of the FA itself. Section 94 (1) is the general power given to the central government to make rules to carry out the provisions of Chapter V of the FA. The words ‘carry out’ necessarily imply providing a mechanism for the levy enforcement and collection of service tax. The Rules in this sense are instrumental and intended to achieve the objects of the main statute.

Rule 6A is ultra vires Section 94 (2) (f)

The High Court  analysed the various sections and observed as under

Section 94(2), it basically lists out the topics on which rules can be made. It talks of laying down the procedure for carrying out various tasks set out in the FA or to provide the form in which returns are to be filed, appeals preferred. Specific to the case on hand, 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.

Section 93B of the FA states that the Rules made under Section 94 would also apply to any other service “in so far as they are relevant to the determination of any tax liability…or for carrying out the provisions of Chapter V” of the FA. However 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 93 B 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.

By virtue of Section 64(3) the whole of Chapter V applies only to taxable services, and Section 66C of the FA falls in that very chapter, the rules made by the central government under Section 66C 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.

On the contention that tour operator service provided in India was not in the negative list under Section 66D of the FA and is, therefore, amenable to service tax, the Court explained that notwithstanding that Chapter V of the FA applies only to taxable services by virtue of Section 64 (3) FA, a non-taxable service that is provided outside the taxable territory can also be included by Rule 6A of the ST Rules in determining what constitutes export of services. 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.

On the taxability of composite services provided by the tour operators, the High Court opined that 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. The Court observed that as held by the Supreme Court,  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 an additional ground of invalidation of the levy itself.

The High Court clarified that 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.

Held:

(i) Rule 6A (1) read with Section 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.

(ii) 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. They only enable the central government to determine what constitutes export of service, the date for determination of the rate of service or the place of provision of taxable service.

(iii) Section 66 C of the FA enables the central government only to make rules to determine the place of provision of taxable service but not nontaxable service.

The High Court summed up the net result of the above as that the 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.

This Court also observed that if as a result of the judgment any service tax becomes refundable, the claim for refund will be processed and paid in terms of the extant provisions of the FA read with the Central Excise Act 1944 and the rules thereunder. 

Service Tax on foreign tourists operator services

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