India: Delhi High Court Rules On The Issue Of Payment Of Service Tax By Tour Operators During The Period Between July 2012 To July 2017

Last Updated: 8 November 2017
Article by S.S. Rana & Co. Advocates

Brief Background

The Writ Petition was filed by the Indian Association of Tour Operators (hereinafter referred to as the 'Petitioners'), which is the National Body of the tourism industry. Established in 1982, it has over 1600 members covering all segments of the Tourism Industry. In the present instance, the Petitioners seek two things -

  1. a declaration by the Delhi High Court that Rule 6A of the Service Tax Rules, 1994 (hereinafter referred to as the 'ST Rules') concerning 'Export of Services' is ultra vires the Finance Act, 1994 (hereinafter referred to as the 'Finance Act').
  2. Challenges the validity of Section 94 (2) (f) of the Finance Act 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'.

A lot of members of the Petitioners are Indian tour operators who are engaged in the business of arranging tours for foreign tourists visiting India as well as the neighboring countries in the Indian Sub-continent. They enter into contracts with their foreign clients either directly or through foreign tour operators. The Petitioners also state that the foreign tourists/foreign tour operators make the entire payment for the package tour in convertible foreign exchange through bank transfer, or bank draft or credit card payments, etc.

The Petitioners state that prior to insertion of Section 6A of the ST Rules with effect from July 1, 2012, tour operator services provided to foreign tourists were treated as 'Export of Services' and exempted from the levy of service. The invoices further submitted by the Petitioners that were raised after July 1, 2012 reveal that service tax @ 3.09 % is charged on the cost of services provided by the Indian tour operators to foreign tourists.

However, with the introduction of the Goods and Service Tax regime with effect from July 1, 2017, the provisions of the earlier Finance Act became redundant, and thus, the Petitioners are only concerned with the legal position as it existed prior to July 1, 2017. Thus, the present Writ Petition is concerned with the question of payment of Service Tax by the Indian tour operators in respect of the services provided by them to foreign tourists during the period between July 1, 2012 and July 1, 2017.

However, before proceeding into the arguments advanced from both the sides, let us first look into the history and evolution of the Acts and Rules that are germane to the present petition.

Position Prior to July 1, 2012

  1. Service Tax was introduced for the first time by the Finance Act, with effect from July 1, 1994.
  2. The relevant provisions concerning service tax were set out in Chapter V of the Finance Act.

    1. Section 64 (1) stated that Chapter V will be applicable to the whole of India except Jammu and Kashmir
    2. Section 64 (3) provided that it would apply to 'taxable services provided on or after the commencement this Chapter'.
    3. Section 65 (105) of the Finance Act defined 'taxable service' to mean 'any service provided or to be provided' to a whole range of persons as mentioned in clauses (1) to (w)
    4. Clause (m) of Section 65 (105) of the Finance Act, stated that the provision of service to any person 'by a tour operation in relation to a tour' would be a taxable service.
    5. Section 66 of the Finance Act provided for the 'charge of service tax' at the rate of 12 % of the value of the taxable service referred to in Section 65 (105) (n).
    6. Section 93 (1) of the Finance Act empowered the Central Government to exempt a taxable service of any specified description.
    7. The rule making power of the Central Government is provided in Section 94. Section 94 (1) states that the Central Government may make rules for carrying out the provisions of Chapter V of the Finance Act which pertained to service tax.
    8. Section 94 (2) permits the Central Government to make rules on matters specified therein "without prejudice to the generality of" the power under Section 94 (1).
    9. Section 94 (2) (f) permits the Central Government to make rules 'for determining export of taxable service'.
  3. On the strength of Sections 93 and 94 (2) (f) of the Finance Act, the Central Government issued the Export of Services Rules, 2005 (hereinafter referred to as 'ESR 2005').

    1. Rule 3 (1) (ii) ESR 2005 inter alia stated that "export of taxable services shall in relation to taxable services specified in sub-clause (n) of clause (105) of Section 65 of the Act, be provision of such services as are performed outside India".
    2. The proviso thereto stated that where such taxable service is partly performed outside India, "it shall be treated as performed outside India."
    3. Rules 3 (2) of ESR 2005 initially stated that the provision of any taxable service specified in Rule 3 (1) shall be treated as export of service when the following conditions are satisfied, viz.:

      1. such service is delivered outside India and used outside India; and
      2. payment for such service provided outside India is received by the service provider in convertible foreign exchange.
    4. The Explanation to the Rule 3 (2) stated: "for the purposes of this rule 'India' includes the installations, structures and vessels in the continental shelf of India and the exclusive economic zone of India."
    5. Rule 3 (2) of ESR 2005 underwent changes first in 2007 and then again in 2010. As a result of these amendments, Rule 3 (2) ESR read thus

      3 (2) The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:
      (a) (omitted)
      (b) payment for such service is received by the service provider in convertible foreign exchange
    6. The Explanation to Rule 3 (2) too underwent a change and read thus after the 2010 amendment: "For the purposes of this rule 'India' includes the installations, structures and vessels 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 supply thereof."
    7. Rule 4 of the ESR 2005 stated: "Any service, which is taxable under clause (105) of Section 65 of the Act, may be exported without payment of service tax."
  4. The resultant position, prior to July 1, 2012, as far as export of tour operator services was that even if a part of the service was performed outside India and the remaining was performed in India, then 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.

Position after July 1, 2012

  1. Significant changes were introduced in Chapter V of the Finance Act with effect from July 1, 2012 by the Finance Act, 2012.

    1. Section 65 was omitted and substituted by Section 65 B titled 'Interpretations'.
    2. Section 65 B (51) of the Finance Act, defined the expression 'taxable service' to mean any service on which service tax is leviable under Section 66B. Section 66B is the charging provision.
    3. Section 66 B of the Finance Act, inserted by the Finance Act, 2012, with effect from July 1, 2012, provided that: "there shall be levied a tax at the rate of 12 per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed."
    4. A plain reading of the charging provision, Section 66 B of the FA, brings out the following facets:

      1. Service tax is leviable on the value of all services "other than those services specified in the negative list." The negative list of services are set out in Section 66D of the Finance Act, inserted again with effect from July 1, 2012. Tour operator services is not part of the negative list.
      2. Such service should be "provided or agreed to be provided" by one person to another and collected in such manner as may be prescribed.
      3. Such service should be provided or agreed to be provided in the "taxable territory". The expression 'taxable territory' has been defined under Section 65B (52) to mean "the territory to which the provisions of this Chapter apply."
    5. A collective reading of Section 66 B read with Section 64 (1) and Section 65B (52) makes it plain that service tax is leviable only on services provided or agreed to be provided in the 'taxable territory', i.e., the whole of India except Jammu and Kashmir. Such service alone is 'taxable service' which is defined under Section 65 B (51) to mean that "any service on which service tax is leviable under Section 66B." The net result is that services rendered outside the taxable territory of India would not be a 'taxable service' for the purposes of the Finance Act. This is of utmost significance since the entire Chapter V applies, in terms of Section 64 (3) of the Finance Act only to "taxable services provided on or after the commencement of this Chapter."

Contentions of the Petitioner

  • The Petitioner stated that as a representative of Indian tour operators it had made a representation dated May 22, 2012 to the Joint Secretary, Tax Research Unit in the Ministry of Finance seeking exemption to the tour operators under the amended provisions based on foreign exchange earnings. Inter alia it was contended that the principle of Export of Services cannot be changed year after year and that it should be defined through legislation by the Parliament and not by the Rules. Since tour operators were earning huge foreign exchange for the country, they ought to be given the status of exporters of service.
  • The Petitioners also pointed out that although payments were received in convertible foreign exchange, the members of the Petitioner Association did not get the benefit of exports since the place of provision of service was treated as India.
  • According to the Petitioners, the action of the Respondent adversely affected the interests of tour operators as they had to suffer huge service tax liability without being extended the benefit of 'Export of Service'.
  • The Petitioner also contended that there was an anomalous situation being created, where provision of package tour services to foreign tourists outside India, for instance, in the neighboring countries, were also sought to be taxed in India. The Petitioner further referred to the case of Cox & Kings India Limited v. Commissioner1, where it was held by the Customs, Excise and Service Tax Appellate Tribunal that service tax cannot be levied with regard to outbound tours arranged for Indians by the Indian tour operators since it was a service provided outside the taxable territory of India.
  • The Central Thrust of the submission of the Petitioner is that Rule 6A suffers from the vice of excessive delegation. This is because 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. Reference is made to the twin cases of Union of India vs S. Srinivasan and General Officer Commanding-in-chief vs Subhash Chandra Yadav. The Petitioner further pointed out that Section 94 (2) (f) of the Finance Act enabled the Central Government to make rules only for determining export of taxable services. No tax thereon could be levied by the Central Government in terms of the said provision. That was an essential legislative function which could not have been delegated to the Central Government. If Section 94 (2) (f) of the Finance Act too would be vulnerable to invalidation on the ground that it was ultra vires the Finance Act. 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. Thus, Rule 6A was arbitrary, discriminatory and violative of Articles 14 and 19 (1) (g) of the Constitution of India.

Contentions of behalf of the Respondents

  • The Respondents contented that in terms of Section 94 (1) of the Finance Act, it was permissible for the Central Government to make rules as long as they were consistent with the object and purpose of the Finance Act. Relying on the cases of Pratap Chandra Mehta vs State Bar Council of Madhya Pradesh, and Kunj Behari Lal Butail vs State of Himachal Pradesh, the Respondents maintained that Rule 6A of the ST Rules was validly made in terms of the power granted to the Central Government under Section 94 (2) (f) of the Finance Act.
  • The Respondents did not dispute that the services provided outside the taxable territory cannot be made amenable to service tax under Section 66B of the Finance Act. He submitted that other than Section 66B, the Central Government could make rules for determining the place of provision of services. Rule 9 of the PPSR 2012 read with Rule 6A of the ST Rules permitted levy of service tax since the service to the foreign tourist was provided in India by the tour operator located in India.
  • The Respondents further submitted that under Section 93A of the Finance Act, rebate was granted in cases 'where any goods or services are exported.' Section 93B of the Finance Act stated that all rules made under Section 94 and applicable to the taxable services shall also be applicable to any other service insofar as they are relevant to the determination of any tax liability, refund, credit of service tax or duties paid on inputs and input services or for carrying out the provisions of Chapter V of the Finance Act.

Judgment

  • 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 Finance Act and in particular Section 94 (2) (f) of the Finance Act and is, therefore, invalid.
  • Section 94 (2) (f) or (hhh) of the Finance Act 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.
  • Section 66 C of the Finance Act enables the Central Government only to make rules to determine the place of provision of taxable service but not non-taxable service.
  • The net result is that the services provided by Indian tour operators to foreign tourists during the period from July 1, 2012 to July 1, 2017, which has been paid for in convertible foreign exchange would not be amenable to service tax.

Court should apply the principle of 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. This Court would only like to observe that if as a result of this judgment any service tax becomes refundable, the claim for refund will be processed and paid in terms of the extant provisions of the Finance Act read with the Central Excise Act 1944 and the rules thereunder.

Footnote

1. 2014 (35) STR 817 (Tri-Del)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
S.S. Rana & Co. Advocates
Similar Articles
Relevancy Powered by MondaqAI
Vaish Associates Advocates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Vaish Associates Advocates
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions