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Judgment
K.S. JHAVERI, CJ
This writ application has been filed assailing the constitutional validity of the provision of sub-Clause (iv) of Rule 2 (1)(d) of Service Tax Rules,
1994, which has been inserted with effect from 16.8.2002 by virtue of Notification No.12/2002-Service Tax, dated 01.8.2002. The petitioners further
pray for a direction to set aside the notice to show cause No.C.No.IV(9)/2/S.Tax/RKL-II/04/151 dated 10.01.2005, issued by the Assistant
Commissioner, Central Excise & Customs, Rourkela-II Division, Rourkela-opposite party no.3, pursuant to such notification.
The facts, in a nutshell, necessary for adjudication of this case are that petitioner no.1 is a Company incorporated under the Companies Act and
carries on its business in producing cement. With effect from February 1994, the Service Tax was brought into the statute book for the first time
through Finance Bill, 1994-95. Subsequently, vide notification dated 02.7.1997 of the Central Government (Annexure-1) ‘Consulting
Engineering’ services was brought under the purview of service tax. Again by virtue of Section 68 of the Finance Act 1994, confers power on the
Central Government to notify the taxable services. Accordingly, the Central Government in exercise of the power under sub-sections (1) and (2) of
Section 94 of the Finance Act, 1994 made the Rules by amending the Service Tax Rules 1994. By virtue of impugned notification dated 01.08.2002,
sub-Clause (iv) to Rule 2 (1)(d) of Service Tax Rules, 1994 brought into the statute book. For ready reference, the same is reproduced hereunder:
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
…
New Delhi, dated the 1st August, 2002
10 Sravana 1924 (Saka)
NOTIFICATION
No.12/2002-SERVICE TAX
G.S.R. (E)- In exercise of the powers conferred by sub-section (1) read with sub-section (2) of section 94 of the Finance Act, 1994 (32 of
1994), the Central Government hereby makes the following rules further to amend the Service Tax Rules, 1994, except as respects things
done or omitted to be done before such amendment, namely:-
(1)These rules may be called the Service Tax Amendment Rules, 2002.
(2) They shall come into force on the 16th day of August 2002.
In the Service Tax Rules, 1994, (hereinafter referred to as the said rules) in rule 2, in sub-rule (1), in clause (d).
(a) in sub-clause (iii), after the words “general insurance businessâ€, the words “or the life insurance business, as the case may be,â€
shall be inserted;
(b) after sub-clause (iii), the following clause shall be inserted, namely;-
“(iv) in relation to any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in
India, the person receiving taxable service in India.â€
In rule 4 of the said rules, in sub-rule (1), the third proviso shall be omitted:
In rule 6 of the said rules:-
(i) in sub-rule (1), the second proviso shall be omitted:
(ii) after sub-rule (2), the following sub-rule shall be inserted, namely:-
“(2A) For the purpose this rule, if the assessee deposits the service tax by cheque, the date of presentation of cheque to the bank
designated by the Central Board of Excise and Customs for this purpose shall be deemed to be the date on which service tax has been paid
subject to realization of that cheque.â€
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Show-cause notice impugned herein came to be issued against the petitioners (Annexure-3) in exercise of the aforesaid amended provision,
because the petitioner-Company placed an order with M/s. Loesche GmbH of Germany for supply of one standard Cement Vertical Roller Mills
(hereinafter referred to as CVRM-III) during the year 2002-03 to 2004-05 and it was supplied to the petitioner-Company for which the petitioner-
Company paid a sum of Rs.5,63,60,645/-. The said standard engineering plans, drawings and technical documents supplied by M/s. Loesche GmbH
were exported by them and imported into India by the petitioner-Company through foreign post/courier services and cleared by following due
formalities. Accordingly, four invoices were raised on 22.10.2003 by the overseas supplier namely, M/s. Loesche GmbH of Germany on the petitioner-
Company. On 28.8.2004 audit objection was raised by the audit party of the Commissioner, Central Excise & Customs, Bhubaneswar-opposite party
no.2, alleging that the petitioner-Company is liable for service tax in respect of the value of the said engineering plans, drawings and designs imported
by it from M/s. Loesche GmbH of Germany for rendering services under the heading of ‘Consulting engineering Service’. As such, the
petitioner-Company is liable to pay the service tax under the impugned notification dated 01.08.2002. Accordingly, show-cause notice under
Annexure-3 was issued.
Assailing the same, this writ application has been filed.
In course of the argument, learned counsel for the petitioner-Company verily relied upon the judgment of the Hon’ble Supreme Court in the
case of Laghu Udyog Bharati and another v. Union of India and others, (1999) 6 Supreme Court Cases 418. The relevant paragraphs of the said
judgment which are placed reliance by learned counsel for the petitioner-Company is reproduced hereunder:
“7. A perusal of these provisions relating to the machinery of the levy and collection of service tax clearly shows that any action which is
required to be taken is qua the assessee, namely, the person responsible for collecting the service tax which includes his agents.
Section 66, which is a charging section provides that the charge of tax at the rate of 5% is on the value of the taxable services which are
provided to any person by the persons responsible for collecting the service tax. Insofar as the clearing agents and the transporters are
concerned, Section 66 has to be read with Section 65(41) (d), (j) and (m), according to which the taxable service is what, in the case of
clearing and forwarding agents is rendered to his client and in the case of goods transporter is rendered to its customer. The “person
responsible for collecting the service taxâ€, referred to in Section 66, has to be read with Section 65(28) which defines this expression to
mean the person who is required to collect the service tax or to pay the same. It is clear from the reading of these provisions that according
to the Finance Act the charge of tax is on the person who is responsible for collecting the service tax. It is he, who by virtue of the
provisions of Section 65(5) is regarded as assessee. He is the person who provides the service.
Section 68(1-A) is a special provision which has been inserted by the Finance Act, 1997. According to Section 68(1) ""every person who
was providing the taxable service is the one who is required to collect the service tax at the rate specified in Section 66."" With respect to the
taxable services referred in Items (g to r) of clause (41) of Section 65, Section 68(1-A) provides that the service tax for such service shall be
collected from such person and in such manner as may be prescribed and to such person all the provisions shall apply as if he is the Person
responsible for collecting the service tax in relation to such service. As we read Section 68 it does not in any way seek to alter or change the
charge of service tax levied under Section 66, which is on the person responsible for collecting the service tax. It also does not to our mind,
in any way, amend any of the clauses of Section 65 which contains the definitions of different expressions. All that Section 68(1-A) enables
to be done is that with regard to the assessees or the persons who are responsible for collecting the service tax, the individual or the officer
concerned can be identified and it is that person who would be a person responsible for collecting the service tax. In other words this
provision, namely, Section 68(1-A) cannot be so interpreted as to make a person an assessee even though he may not be responsible for
collecting the service tax. The service tax is levied by reason of the services which are offered. The imposition is on the person rendering the
service. Of course, it may be an indirect tax; it may be possible that the same is passed on to the customer but as far as the levy and
assessment are concerned it is the person rendering the service who alone can be regarded as an assessee and not the customer. This is the
only way in which the provisions can be read harmoniously.
By amending the definition of “person responsible for collecting of service tax†in the impugned rules with regard to services
provided by the clearing and forwarding agents and the goods transport operator a person responsible is said to be the client or the
customer of the clearing and forwarding agents and the goods transporter. In relation to the services provided by others and referred to in
sub-rule (i) to (xi) and (xiii) to (xvi) of Rule 2(d), the definition of the person responsible is in consonance with the definition of that
expression occurring in Section 65 of the Act. However, with regard to the service rendered by clearing and forwarding agents and the
goods transport operator the definitions contained in Rule 2(d)(xii) and (xvii), which seek to make the customers or the clients as the
assessee, are clearly in conflict with Sections 65 and 66 of the Act.
Section 68(1-A) cannot, to our mind, regard a customer or a client of the clearing and forwarding agent or of the goods transport
operator being treated as an assessee who will become liable to file a return and be subjected to the levy of service tax and if he does not
file the return, would render himself to penalty and other proceedings. In this connection we may refer to Sections 70 and 71 which read as
under :
“70. Person responsible for collecting service tax to famish prescribed return-(1) Every person responsible for collecting the service tax
shall furnish or cause to be furnished to the Central Excise Officer in the prescribed form and verified in the prescribed manner, a
quarterly return, within fifteen days of the end of the preceding quarter, showing -
(a) the aggregate of payments received in respect of the value of taxable services;
(b) the amount of service tax collected;
(c) the amount of service tax paid to the credit of the Central Government; and
(d) such other particulars as may be prescribed;
(2) In the case of any person who, in the opinion of the Central Excise Officer, is responsible for collecting service tax under this Chapter
but who has not furnished a return under sub-section (1), the Central Excise Officer may, before the expiry of the quarter in which the
return is to be furnished, issue a notice to such person and serve it upon him, requiring him to furnish within thirty days from the date of
service of the notice the return in the prescribed form and verified in the prescribed manner setting forth the prescribed particulars.
 (3) Any person responsible for collecting the service tax who has not furnished the return within the time allowed under sub-section (1) or
sub- section (2) or having furnished a return under sub-section (1) or sub- section (2), discovers any omission or wrong statement therein,
may furnish a return or a revised return, as the case may be, at any time before the assessment is made.
Assessment.-(1) For the purposes of making an assessment under this Chapter, the Central Excise Officer may serve on any person, who
has furnished a return under section 70 or upon whom a notice has been served under sub-section (2) of Section 70 (whether a return has
been furnished or not), a notice requiring him on a date therein to be specified , to produce or cause to be produced such accounts or
documents or other evidence as the Central Excise Officer may require for the purposes of this Chapter and may, from time to time, serve
further notices requiring the production of such further accounts or documents or other evidence as he may require.
(2) The Central Excise Officer, after considering such accounts documents or other evidence, if any, as he has obtained under sub-section
(1) and after taking into account any relevant material which he has gathered, shall, by an order in writing, assess the value of taxable
service and the amount of service tax payable on the basis of such assessment.â€
These sections clearly show that the return which has to be filed pertains to the payment which are received by the person rendering the
service in respect of the value of the taxable services. Surely, this is a type of information which cannot, under any circumstances, be
supplied by the customer. Moreover the operative part of sub-section (1) of Section 70 clearly stipulates that it is a person responsible for
collecting the service tax who is to furnish the return. By rules which are framed, the person who is receiving the services cannot be made
responsible for filing the return and paying the tax. Such a position is certainly not contemplated by the Act.â€
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He further relied upon the decision of the Bombay High Court in Indian National Shipowners Association and another v. Union of India and others,
[2009] 21 VST 60 (Bom) and submitted that the tax which was sought to be levied cannot be collected from the recipient of those services, who is
based in India. The service tax makes the person, who is providing the service, liable to pay. As such the Rules, more particularly Rule 2 (1)(d)(iv) of
Service Tax Rules, 1994 (for short “the 1994 Rulesâ€) cannot be held to be in conformity with the provisions of the Act and the Constitution of
India. For ready reference relevant portion of the decision in the case of Indian National Shipowners Association (supra) is reproduced hereunder:
Reliance is placed on the provisions of rule 2(1)(d)(iv) quoted above for justifying the levy of service tax for the period from August 16, 2002. Perusal of the
above quoted rule 2(1)(d)(iv) shows that by that provision a person liable for paying service tax was defined to mean in relation to any taxable service provided
by a person who is a non-resident or is from outside India to a person in India receiving taxable service. Apart from the fact that this rule is contrary to the
provisions of Section 68 and other provisions of the Act, under this provision the recipient of the service became liable for paying service tax provided the service
was received in India. The entire case of the petitioners is in relation to the service received by the vessels and ships owned by the members of the petitioner-
association outside India. Therefore, it cannot be said that on the basis of rule 2(1)(d)(iv), service tax can be levied on the members of the petitioners-association.
It is further to be seen here that Section 64 gives powers to the Central Government to make rules for carrying out the provisions of the Chapter. The Chapter
relates to taxing the services which are provided, the taxing on the value of the service and it is only the person who is providing the service can be regarded as
an assessee. The rules therefore, cannot be so framed as not to carry out the purpose of the Chapter and cannot be in conflict with the provisions of Chapter V of
the Act. In other words, as the Act makes the person who is providing the service liable, the provisions in the Rules cannot be made so as to make the recipient of
the service liable. It is, thus, clear that the provisions of rule 2(1)(d)(iv) are clearly invalid.
So far as reliance placed on the notification dated December 31, 2004 for justifying levy of service tax from the members of the petitioners-association is
concerned, that notification has been issued under sub-section (2) of Section 68 of the Act. Sub-section (2) of Section 68 reads as under:
68(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the Official Gazette, the
service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in Section 66 and all the provisions of this Chapter
shall apply to such person as if he is the person liable for paying the service tax in relation to such service.
The above provision authorises the Central Government to notify the taxable service, in relation to which the rules can be framed, in relation to such service.
By the notification dated December 31, 2004, any taxable service provided by a person who is a non-resident or is from outside India is notified. If rule 2(1)(d)(iv)
is taken to be rule framed pursuant to this provision, then a person who receives taxable service in India from a person who is non-resident or is from outside
India becomes taxable and not service rendered outside India by a person who is non-resident or is from outside India. Therefore, levy of service tax from the
members of the petitioners-association from February 1, 2005 cannot be justified.
Then reliance is placed on Explanation which is added below Section 65(105). That Explanation was added by the Finance Act, 2005 with effect from June
16, 2005. That Explanation reads as under:
Explanation - For the removal of doubts, it is hereby declared that where any 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 is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be,
usual place of residence, in India, such service shall be deemed to be taxable service for the purposes of this clause.
By this Explanation services provided by a non-resident outside India to a person residing in India has been declared to be taxable service. Therefore, though
the services provided to the members of the petitioners-association outside India becomes taxable service, the charge of the tax continues to be on the provider of
service as per the scheme of the Act, and because of the Explanation also the respondents do not get authority of law to levy service tax in relation to the services
rendered to the vessels and ships of the members of the petitioners-association outside India.
It appears that a similar provision in the rules was made applicable by the Government in relation to the clearing agents by making customers of the clearing
agent liable for levy of the service tax. That question has been decided by the Supreme Court by its judgment in the case of Laghu Udyog Bharati (supra) and the
Supreme Court has clearly laid down that the imposition of the service tax is on the persons rendering the services and by making a provision in the Rules, levy of
tax cannot be shifted to the recipients of the services and the rule framed, which brought about this situation, has been declared by the Supreme Court to be
invalid. The law laid down by the Supreme Court in its judgment in Laghu Udyog (supra) is squarely applicable to rule 2(1)(d)(iv), which is relied on in this
case. It appears that it is first time when the Act was amended and Section 66A was inserted by the Finance Act, 2006 with effect from April 18, 2006, the
respondents got legal authority to levy service tax on the recipients of the taxable service. Now, because of the enactment of section 66A, a person who is resident
in India or a business in India becomes liable to be levied service tax when he/it receives service outside India from a person who is non-resident or is from
outside India. Before enactment of section 66A it is apparent that there was no authority vested by law in the respondents to levy service tax on a person who is
resident in India, but who receives services outside India. In that case till section 66A was enacted a person liable was the one who rendered the services. In other
words, it is only after enactment of section 66A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian
residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider. Before enactment of section 66A, there was no such
provision in the Act and therefore, the respondents had no authority to levy service tax on the members of the petitioners-association.
In the result, therefore, the petition succeeds and is allowed. Respondents are restrained from levying service tax from the members of the petitioners-
association for the period from March 1, 2002 till April 17, 2006, in relation to the services received by the vessels and ships of the members of the petitioners-
association outside India, from persons who are non-residents of India and are from outside India.
Rule made absolute accordingly. No order as to costs.
Article 265 of the Constitution of India lays down that no tax shall be levied or collected except by authority of law. As such, the impugned
notification and amendment is ultra vires the Constitution and is liable to be set aside.
Learned counsel appearing for the Central Government contended that Section 68 of the Finance Act empowers the Government to make rules for
effective implementation of the provisions of the Act. As such, Rule 2 (1)(d)(iv) of the 1994 Rules was incorporated in the statute book. As the
service provider carries on its business outside in India, no service tax can be collected from it. Accordingly, the provisions have been made to collect
the same from the recipient of service which cannot be held to be ultra vires.
Taking into consideration the submissions made by learned counsel for the parties and in view of the law laid down in Laghu Udyog Bharati as well
as Indian National Shipowners Association (supra), we are of the considered view that all taxable services are defined in Section 65 of the Finance
Act which include only three types of services namely, any service provided to an investor by a stock-broker, to a subscriber by telegraph authority
and to a policy holder by a insurer carrying on general insurance business. Section 68 of the Act requires every person providing the taxable service to
collect service tax at the specified rate. Section 69 of the Act provides that registration of a person responsible for collecting service tax. Sub-section
2 of Section 5 of the Act indicates that it was the provider of the service, who is responsible for collecting the tax and obliged to get itself registered.
Thus, on a conspectus of Section 65, 66, 68 and 69 of the Act make it abundantly clear that no tax for rendering service can be collected from the
recipient of service.
Therefore, the rule empowering the authorities to collect service tax from the recipient of services cannot be held to be valid and in conformity
with law. Accordingly, the same is liable to be set aside.
Thus, we hold that Rule 2 (1)(d)(iv) of Service Tax Rules, 1994 is ultra vires the provisions of the Act and the Constitution and is accordingly
declared bad in law. Consequently, the show-cause notice under Annexure-3 cannot stand scrutiny of law. Accordingly, the same is set aside.
The writ application is allowed to the extent stated above.
No order as to cost.
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