1. Service tax authorities, of late, have been issuing notices to various borrowers of External Commercial Borrowings (ECB’s) from foreign branches of Indian banks and holding them liable to pay Service tax from September 10, 2004 under section 65(12)(a)(ix) of the Finance Act, 1994 which covers ECBs.
According to the borrower, the responsibility of paying service tax is of the service provider which is the foreign branch of the Indian bank and, hence, the Indian bank having a permanent establishment in India, is supposed to pay and not the borrower.
The contention of the service tax authorities is partially correct after coming into effect of section 66A of the Finance Act, 1994 from April 18, 2006.
Until the coming into effect of section 66A, the liability and obligation to pay service tax was that of Indian bank and not that of the borrower. Contrary to the contention of the service tax authorities, even under rule 2(1)(d)(iv) of the said Rules, effective from August 16, 2002 and June 16, 2005 respectively, the borrower cannot be made liable for the payment of service tax.
2. Rule 2(1)(d)(iv) reads as follows :—
‘Person liable for paying the service tax’ means,—
(iv) in relation to any taxable service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service provider does not have any office in India, the person who receives such service and has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India.”
From the aforesaid provisions, it would be clear that until April 18, 2006, the requirement under rule 2(1)(d)(iv) was that only in case where the service provider did not have any office in India, the person receiving taxable service was liable for paying service tax involved. In the cited case, the Indian Bank having its registered and head office in India, and a branch in a foreign country cannot be said to be a service provider who did not have an office in India.
After coming into effect of section 66A, rule 2(1)(d)(iv), substituted with effect from April 18, 2006 by the Service Tax (Second Amendment) Rules, 2006, reads as follows :—
“‘Person liable for paying the service tax’ means –
(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service;”
As such, until April 17, 2006, the borrower was not a ‘person liable for paying service tax’ within the meaning of the Act and the said Rules, including rule 2(1)(d)(iv) thereof.
It is relevant to note herein that the phrase ‘does not have any office in India’, in rule 2(1)(d)(iv), stands omitted from the substituted rule. As such, with effect from April 18, 2006, in any case where the taxable service is provided or is to be provided by either a person who has established a business in a country other than India or has a fixed establishment from which the service is provided or is to be provided in a country other than India or has his permanent place or usual place of residence in a country other than India, the service recipient in India would be treated as if it has itself provided the service in India and, accordingly, it would be liable to pay the service tax and comply with all procedural and other requirements as specified in the Act and the said Rules. The respective clauses in section 66A (1) (a) are disjunctive and, hence, once any of the three alternatives contained therein are satisfied, the service recipient becomes liable to pay service tax on the taxable service involved.
Applying the aforesaid provision, since the service is being provided by foreign branch of an Indian Bank, the condition precedent laid down in section 66A(1)(a) is satisfied and, in the absence of the phrase ‘does not have any office in India’ in rule 2(1)(d)(iv), as recipient of the services, the borrowers would be liable to make payment of the service tax payable on the ‘Banking and Other Financial Services’.
3. The fees paid or to be paid are liable to service tax under ‘Banking and Other Financial Services’ under the Act with effect from September 10, 2004. The liability to pay service tax for the period prior to April 18, 2006 would be that of Indian Bank and on and from April 18, 2006, would be that of the borrowers.
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