Presentation on

Services rendered outsideTerritorial waters:

Applicability of Service Tax Law on the modified Territory

Akshata Srinath, 4th Year, School of Law, Christ UniversityBangalore.Mentor- Ms. Amudha,Lakshmi Kumaran and Sridharan, Delhi

Synopsis of the Presentation

Service Tax- A glimpse Budget 2009 Notifications Definition and words Redefining the Territory of

India Implications of the

Notification• The Amendment- Indian National

Ship-owners Association and Others v. Union of India and Anothers- 2009 (111) Bom. L. R. 1529.

• Changes after the Notification• Reserve Charge Mechanism - §

66A Questions Conclusion

Service Tax- A glimpse

Chapter V of the Finance Act 1994. Article 265 of the Constitution of India. Constitution (95th Amendment) Act, 2003. Amendment to 7th sch., List 1- Union List- 92 C-

Article 268 A Taxable Services- § 65

Budget 2009

Finance Bill 2009:Changes in

Indirect Taxes

Territorial jurisdictionof India extended

Composition schemeunder

works contract service

Exemption to a particular service under

certain existing category

Amendments inCenvat Credit Rules, 2004

Duty rate and exemption

Service tax ontransfer of right

to use IT software

New servicesand expansion ofsome services

Notifications

No. 21/2009-ST dated 7th July 2009

In the said notification, for the portion beginning with the words “designated areas in the Continental Shelf” and ending with the words “with immediate effect”, the words “installations, structures and vessels in the continental shelf of India and the exclusive economic zone of India” shall be substituted.

No. 1/2002-ST dated 1st March 2002

Central Government hereby extends the provisions Chapter V of the Finance Act (32 of 1994) to the designated areas in the Continental Shelf and Exclusive Economic Zone of India as declared by the Notifications of the Government of India in the Ministry of External Affairs Nos. S. O. 429 (E) dated the 18th July 1986 and S.O. 643 (E), dated the 19th September, 1996 with immediate effect.

Diagram

Words and Definitions

The Territorial Waters, Continental Shelf, Exclusive Economic Zones and other Maritime Zones Act, 1976 Continental shelf Exclusive Economic Zones Designated and Non designated areas

United Nations Convention on the Law of the Sea Installations and Structures- Not defined Vessels- Section 2(z) The Major Port Trust Act, 1963 Foreign Going Vessel- Section 2(21) The Customs

Act, 1962 Caisson- Under Definition of Vessel Intention of the Parties Interpretation

Redefining Territory of India

The Constitution of India Part 1 Article 1 Article 297

The Territorial Waters, Continental Shelf, Exclusive Economic Zones and other Maritime Zones Act, 1976 Section 3- Sovereignty over, and limits of territorial waters. Section 6(5), 6(6), 7(6)

United Nations Convention on the Law of the Sea Part V Part VI Part VII

Notifications No. 22/2002-Cus., dated 23rd April 2002 No. GSR 304(E), dated 31st March 1983 No. 25/2009- ST dated 19th August 2009 No. 22/2009 dated 07th July 2009

Conti…

Section 2(28) General Clauses Act, 1897- India Shall mean- (a) as respects any period before the establishment of the Dominion of India, British India together with all territories of Indian Rulers then under the suzerainty of His Majesty, all territories under the suzerainty of such an Indian Ruler, and the tribal areas; (b) as respects any period after the establishment of the Dominion of India and before the commencement of the Constitution, all territories for the time being included in that Dominion; and (c) as respects any period after the commencement of the Constitution, all territories for the time being comprised in the territory of India.

Cases Aban Loyd Chiles Offshore Ltd. v. Union of India, 2008 (154) ECR 0213 (SC)- Amerhsip Management (P) Ltd. & ors. v. Union of India & ors., 1996 (86)

ELT 15 (Bom) Coen Company v. Commissioner of Central Excise (Appeals), Mangalore,

2006 (2) S.T.R. 488 (Tri- Bang.). Mc Dermott International Inc. v. Deputy CIT

[1994] 49 ITD 590 (Delhi- Trib) Pride Foramer v. Union of India and Ors.,

AIR 2001 Bom 332.

Implications of the Notification

Petitioner Challenged Constitutional Validity of Section 66A Explanation to Section 65 (105) Rule 2(1) (d) (iv)

The respondents are seeking to levy and recover tax from Persons resident in India on the services Services are rendered and/or performed outside India By non resident service providers

The services are provided outside India, tax collected and levied from recipient of services based in India

Petitioners -Indian National Ship owners Association (Non profit making co.), members are the owners of the India Flag Vessels

The Amendment Indian National Ship-owners Association and Others v. Union

of India and Anothers2009 (14) STR 289 (BOM)- Facts of the Case

Merchant Shipping Act, 1958

Customs House Agents servicesSteamer Agent servicesClearing and forwarding Agents servicesPort servicesCargo Handling servicesStorage and Warehouse servicesMaintenance or Repair servicesTechnical Inspection and Certification servicesOther Port servicesGeneral Insurance servicesManpower Recruitment and Supply Agency’s servicesManagement Consultant’s servicesBanking and other Financial servicesBusiness Auxiliary servicesTechnical Testing and Analysis servicesTelegraph services

Taxable services underSection 65 (105)

SubstantiallyAmended

No demand of Service Tax made till February 2002 After Coming of the Notification, First time demand for Service

Tax was made to the petitioner- Services rendered beyond the EEZ and Continental shelf

Service Tax Circular No. 36/4/2001dated 8th October 2001 clarifiedService Tax beyond the territorial

waters not applicable

Service Tax Circular No. 1/2002dated 1st March 2002 clarified

Service Tax beyond the territorialwaters applicable to designated areas

Notification No. 36/2004 ST dated 31st December 2004Powers given to Central Govt., Section 68 (2)

Telephonic connection/pager/telex etcGeneral InsuranceInsurance auxiliary serviceTransport of goods by roadFactories/ Companies/ CorporationsSocieties and Cooperative Societies Dealer of Excisable goods

1st Jan ‘05

A) Services B

Any taxable service provided by aperson who is non resident or is fromoutside India and have no office in India

Any Body Corporate

Reading Notification and Subsection 2 of 68 and scheme of the Act- Recipients of the service cannot be made liable.

Rule 2 amended on 16 June 2000- Invalid quote acc. to Counsel: Contrary to Scheme

18th April 2006- Section 66 A was added. No Service Tax could be charged before this date.

Rule 2(d)(iv) should be read harmoniously complementing Section 68 (2)

Challenging payment of service tax from 1-3-2002 to 17-4-2006 Was there a valid law in this time period which authorizes the levy

of service tax in relation to the services rendered outside India?

(iv) In relation to any taxable services provided or to be provided by a person,who has established a business or has fixed establishment from which the

service 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 nothave any office in India, the person who receives such services or has pace of

business, fixed establishment, permanent address or, as the case may be,usual place of residence, in India

Section 65, 66, 68 and 69 are pertinent to the present case- Subsequently amended

Provisions of section 65 (105)- Taxable services

Notification of March 2002- Does not the effect of levying service tax on recipients p.15

The provision of the rule (Contrary to 68(2))- in relation to the taxable services provided by person non resident to person receiving taxable service in India- Provided Services are received in India

Rule not applicable becomes the services are rendered outside the Country

Section 64- Powers to the Central Govt. Invalidity of the Rule 2 (d) (iv) Explanation- Services provided by non resident outside India to

person in India declared to be taxable The charge of the service Tax continues to be on the provider of

the service- scheme of the Act

Before 18-4-2006The charge of ST is on person

responsible for collecting Service Tax

Judgment in a Nutshell Bombay High Court

Notification no. 1/2002- St dated 1-3-2002 does not levy service tax on the service recipients

Rule 2 (d) (iv) does not apply to levy of service tax on services rendered from outside India

Under the above rule, service receipts cannot be made liable to pay tax

The above rule would apply as services were received by the assessee outside India and not in India

The notification 1/2002- does not have the effect of levyingservice tax on recipients- is plainly without the authorityof Law

Changes after Notification

Increase in the Indirect Tax Revenue

No Difference between the Designated and Non designated areas- Eastern Coastal areas ie. KG Basin, PV3 and the Bombay high oil drilling wells of Western Coastal areas

Increase in the cost of oil exploration

Defining the words; Installations and Structures

Reverse Charge Mechanism- § 66A

Notification no. 31/2007 dated May 22, 2007. Recipient of services in India will be charged with service tax. Applicable only to services under Section 65 (105) of the Finance

Act, 1994. Two elements;

1. Services received by person on India2. Service provider situated outside India

M/S Intas Pharmaceuticals Ltd. V. CST, Ahmedabad, STO 2009 CESTAT 914- held that where reverse mechanism is not applicable, Service Tax would not be levied. The reverse charge mechanism basically shifts the burden of service tax to the receiver and if there is no liability on the service provider, the question of shifting the charge does not arise and hence non applicability of Service Tax is acknowledged.

Place of performan

ce of service

Location of service

provider

Pre-Budget period

Post-Budgetperiod

Designated coordinates

Within India Taxable in the hands of service provider

Taxable in the hands of service provider in case of ‘installations, structures and vessels’

Designated coordinates

Outside India Taxable on a reverse charge basis

Taxable on a reverse charge basis in case of ‘installations, structures and vessels’

Non-designated coordinates

Within India Not taxable Taxable in the hands of service provider in case of ‘installations, structures and vessels’

Non-designated coordinates

Outside India Not taxable Taxable on a reverse charge basis in case of ‘installations, structures and vessels’ ’

Service TaxPre/Post Budget

Next

Questions According to notification installations,

structures and vessels are territory of India Rights to Extend to ‘Area’?- What constitutes an

area in EEZ and Continental Shelf? Comparison with notification from Income tax,

customs, excise dept.

Conclusion

The Notification extends to all the area of Installations, Structures and Vessels

Therefore the distinction between the designated and non designated area has been removed

Modification for the territory of India for the applicability of the Act

Increase in the revenue from the Structures,Installations, Vessels in the EEZ and theContinental shelf

The amendment of the notification- givenrise to the other unanswered queries

Nothing is certain but death and Tax

-Benjamin Franklin

The Territorial Waters, Continental Shelf, Exclusive Economic Zones and other Maritime Zones Act, 1976

Section 6- Continental shelf(1) The Continental shelf of India comprises of the sea bed and the

subsoil of the submarines areas, extends beyond the limits of territorial waters with the distance of 200 N.M. from the base line; the outer edge of the Continental margin does not extend up to that distance.

(2) India has full and the exclusive rights on the continental shelf includes exploration, exploitation, conservation and management of all resources; exclusive rights and jurisdiction for the construction, maintenance or

operation of artificial islands, off-shore terminals, installations, structures and devices for the above and the convenience of shipping or for any other purpose

exclusive jurisdiction to authorize, regulate and control scientific research; and

exclusive jurisdiction to preserve and protect the marine environment and to prevent and control marine pollution

(3) No person except from the orders of the Central Govt. is allowed to explore.

(4) Central Govt. can make provisions, extend any enactment or even declare areas as designated through notification.

The Territorial Waters, Continental Shelf, Exclusive Economic Zones and other Maritime Zones Act, 1976 Section 7- Exclusive Economic Zones(1) The Exclusive Ecconomic Zones of India comprises of area

beyond and adjacent to the territorial waters and the limit is 200 N.M. from the base line.

(2) Alteration of the Limit, with due respect to the International Law and State Practice

(3) Resolutions to be passed by Both the Houses of the Parliament(4) India has full and the exclusive rights on the EEZ includes

exploration, exploitation, conservation and management of all resources

exclusive rights and jurisdiction for the construction, maintenance or operation of artificial islands, off-shore terminals, installations, structures and devices for the above and the convenience of shipping or for any other purpose

exclusive jurisdiction to authorize, regulate and control scientific research; and

exclusive jurisdiction to preserve and protect the marine environment and to prevent and control marine pollution

(5) No person except from the orders of the Central Govt. is allowed to explore.

(6) Central Govt. can make provisions, extend any enactment or even declare areas as designated through notification.

The Territorial Waters, Continental Shelf, Exclusive Economic Zones and other Maritime Zones Act, 1976

Designated and Non designated area Section 6 (5) and 7 (6) of the Act- Not expressly defined. Difference between the two areas – “Recognition of the Central govt.” The Central Government may, by notification in the Official Gazette,-

(a) declare any area of the continental shelf/ exclusive economic zone to be a designated area; and(b) make such provisions as it may deem necessary with respect to,-(i) the exploration, exploitation and protection of the resources of such designated area; or(ii) other activities for the economic exploitation and exploration of such designated area such as the production of energy from tides, winds and currents; or(iii) the safety and protection of artificial island, off-shore terminals, installations and other structures and devices in such designated area; or(iv) the protection of marine environment of such designated area; or(v) customs and other fiscal matters in relation to such designated area.

Installations and Structures

Installations and Structure (offshore)- Not defined

Can be defined as: Work space below or over the sea

Surface Classified according to the

functions of the Components Supporting components for

transmitting the Goods Functional equipment Foundation structures- mooring

equipments Examples: Drilling equipment,

processing plant, personal quarters etc.

Vessels Back Case

Defined under Section 2(z) of The Major Port Trust Act, 1963. 2(z) "vessel" includes anything made for the conveyance, mainly by

water, of human beings or of goods and a caisson. Caisson- Tight Chamber used for Construction under water. Foreign going vessel defined under Section 2(21) The Customs

Act, 1962 “foreign-going vessel or aircraft” means any vessel or aircraft for the

time being engaged in the carriage of goods or passengers between any port or airport in India and any port or airport outside India, whether touching any intermediate port or airport in India or not, and includes

(i)       any naval vessel of a foreign Government taking part in any naval exercises;

(ii)     any vessel engaged in fishing or any other operations outside the territorial waters of India;

(iii)    any vessel or aircraft proceeding to a place outside India for any purpose whatsoever;

Constitution of IndiaBack

Article 1- 1. Name and territory of the Union.-

(1) India, that is Bharat, shall be a Union of States.(2) The States and the territories thereof shall be as

specified in the First Schedule.(3) The territory of India shall comprise—(a) the territories of the States;(b) the Union territories specified in the First Schedule;

and(c) such other territories as may be acquired.

Article 297- 297. Things of Value within territorial waters

or continental shelf and resources of theexclusive economic zone to vest in the Union

Powers of Central Governmentunder the Territorial Waters, Continental Shelf,

Exclusive Economic Zones and other Maritime Zones Act, 1976

Back

Section 6(5) The Central Government may, by notification in the Official Gazette : (a) declare any area of the continental shelf and its superjacent waters to be a designated area…

6(6)- (6) The Central Government may, by notification in the Official Gazette : (a) extend with such restrictions and modifications as it thinks fit, any enactment for the time being in force in India or any part thereofto the continental shelf or any part (including any designated areaunder sub-section (5)) thereof…

7(6) The Central Government may, by notification in theOfficial Gazette: (a) declare any area of the exclusiveeconomic zone to be a designated area; and…

United Nations Conventions on theLaw of the Sea

Back

Part V deals with EEZ talks about the Jurisdiction, rights and

duties of the of the Coastal states. Also deals with the provisions regarding

the installations, artificial islands and structures

Part VI deals with the Continental Shelf

It defines the Continental shelf Rights and duties of the Coastal states and

the freedom given to the Other states Also deals with the provisions regarding

the installations, artificial islands and structures and also drilling in the Continental Shelf

Part VII deals with High Seas

NotificationsBack

F.No.450/76/93-Cus.IV- Subject: Extension of the jurisdiction of the Customs Act, 1962 and the Customs Tariff Act, 1975 to whole of the EEZ and Continental Shelf under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976-reg.

No. GSR 304(E), dated 31st March 1983 -Subject: Extension of Income Tax Act to the Continental Shelf of India

No. 25/2009- ST dated 19th August 2009- Amending Export of service Rules 2005: Explanation- for the purpose of defining India, India now includes: the installations, structures and vessels in the continental shelf of India and the exclusive economic zone of India.

No. 22/2009 dated 07th July 2009- Subject: Taxation of Services (Provided from outside India and Received in India) Rules, 2006: Explanation- “India” includes the installations, structures and vessels in the continental shelf of India and the exclusive economic zone of India;’.

Facts of the case

Coen Company(non resident), California, USA

M/S JPOCL’sAir Seperation Plant

Contract letter dated 11-7-1997For design, detailed engineeringand preparation of specifications

Not registered under Service Tax“Consulting Engineer”- § 65

Coen Company v. Commissioner of Central Excise

(Appeals), Mangalore, 2006 (2) S.T.R. 488 (Tri- Bang.).

Back

Question raised on- Interpreting the meaning of ‘Consulting Engineer’ and whether a service by non resident of India is to be charged with Service Tax when the service is provided outside India.

The Company did not fall under the Meaning of ‘Consulting Engineer’ since they have only supplied the designs and not rendered any direct service pertaining to consulting engineering services under the Finance Act- para 7.

The recipient of the Technical Know how from a foreign company, not authorized to represent the other company in India, could not be fastened with Service Tax- para 7.

Facts of the case

Indian Land Territory

Mc Dermott Int. Inc.(non- resident)

EEZ andContinental Shelf

Territorial waters

Contract works forBombay High offshore

oil rigs

Section 5(2) andSection 44BB of the

Income Tax Act

Activities and theServices in connection

to Activities

Mc Dermott International Inc. v. Deputy CIT

[1994] 49 ITD 590 (Delhi- Trib)Back

Issue raised- Non applicability of the Notification on Activities. Observed that the CBDT notification No. 5147 [SO 304(E) dated

31-3-1983] Restricted to the income derived by every person from all or any

of the activities carried on within the Continental Shelf and Exclusive Economic Zone of India.

The three activities namely prospecting, extraction and production of mineral oil or natural gas in high seas required the following– digging of deep sea wells and their construction, laying of pipelines for drawing of mineral oil or natural gas, other engineering construction like platform

Basic structure for carrying out work and directly linked to activities.

In this connection, it required the services, equipment, etc., of persons who are familiar with these activities and had invited them.

Section 5(2) had defined the scope of the total income of non-residents, but did not include in its fold the various activities in the Bombay High and the income derived there from.

Facts of the case

Oil rigExclusive Economic Zone of India

Pride Pensylvania-Drilling Machine

Pride Foramer-Registered office in France;

Branch office in Mumbai

Contractor toONGC

Importing Goodsrequired for the useof oil rig not directly 1st Mumbai port,

then transshipped

Section 87- without thepayment of duty

{Payable § 12, Exempted § 53§ 54- Imports for transshipment

?Foreign Going vessel

Pride Foramer v. Union of India and Ors.

AIR 2001 Bom 332.Back

Before the amended Notification The issue was whether ‘Oil rig’ operating in the designated area is a

foreign going ship or not? Emphasis laid on the interpretation of 2(21) of the Customs Act. Customs Act to be read with the Maritime Zones Act; if read

separate then, oil rigs located in the designated areas of the EEZ according to the Customs Act will be treated as ‘place outside India’.

The very purpose of Section 5,6,7 of the Maritime Zones Act- protection, exploitation and exploration in the area; resources belonging to India.

Area, where oil rigs are stationed are the part of India. Municipal Law to be interpreted with respect to the International

Conventions-Vishaka v. State of Rajasthan, AIR 1997 SC 3011. Amerhsip Management (P) Ltd. and ors. v. Union of India & ors.,

1996(86)ELT15(Bom) Discussed and Aban Loyd Chiles Offshore Ltd. v. Union of India, 2008 (154) ECR 0213 (SC)- later case almost with the similar issues and facts.

Facts of the case

M/s Intas Pharmaceuticals Ltd.

Manufacture of Pharmaceutical Productsclaimed refund of Rs. 55, 702

Not liable to pay service tax ontechnical testing and analysis servicesServices fully performed outside India

M/S Intas Pharmaceuticals Ltd. v. CST, Ahmedabad STO 2009 CESTAT 914

Back

When services performed partly in India and partly outside India, then it is treated to be fully performed in India

In this case the services are performed fully in India Technical and testing analysis service- Reverse Charge

Mechanism applicable Interpretation of Rule 3 (ii) of the Taxation of Services

provided from outside India and received I India Rules 2006.- Covering ‘Technical and testing analysis service’

The provision is not applicable with respect to performance of the service completely outside India

Aban Loyd Chiles Offshore Ltd. v. Union of India, 2008 (154) ECR

0213 (SC)Back

Facts same as the Pride Foramer Case.

The vessels of the petitioner engaged in the transportation of goods to the Oil rigs- few were owned and the remaining were taken on time charter.

Main issue was whether the petitioner was required to pay customs?

Whether Oil rig came under the definition of a vessel?

Would the petitioner get the benefit under section 86(2) of transferring of Stores to the oil rigs and under section 54?

Facts same as the Pride Foramer Case.

Engaged in drilling operations and related activities under contracts of ONGC

Oil rigs situated outside the territorial waters of India

Should customs duty be paid on transship stores irrespective of designated and non designated areas?

Distinction between the Territory of India and deeming provisions regarding the extension of the enactment to areas deemed to be the territory of India for the extension of Law.

Amerhsip Management (P) Ltd. and ors. v. Union of India & ors., 1996 (86)

ELT 15 (Bom)

Territorial Boundary

A Snap ShotExports and Imports with Service

TaxBack

Services providedfrom India

Services providedfrom outside India

Used in India

Received in IndiaImport of Services

Not Taxable

Taxable

Used in Outside India

Used outside IndiaExport of Services

India

Outside India