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25 July 2013

Facilitation of cross-border services - Imprecision in the POPS Rules

by Chetan Agrawal


International transactions involving provision of services now revolve around the concept of place of provision of service. Service tax is imposed under Section 66B of the Finance Act, 1994 where the provision of service is from one person to another and the place of provision is in the taxable territory. The place of provision of a service is determinable in terms of the Place of Provision of Services Rules, 2012 (‘POP Rules’).        

Cross-border provision of services generally entails the presence of an agent of the party located outside India. Such an agent is usually a subsidiary of the foreign principal which undertakes facilitation as well as provision of various services on behalf of the principal. Each such case involves provision of two independent supplies, i.e., one from the principal to the ultimate customer and another from the agent to the principal/ ultimate customer. This article focuses on the determination of the place of provision of the service provided by the agent to the principal in cross-border services.        

The services provided by these agents are referred to as the intermediary services under the POP Rules. Any broker, agent or any other person, arranging or facilitating a provision of service (‘the main service’) between two or more persons, is called as intermediary provided such person does not provide the main service on his own account. In other words, the first supply is from the principal to the customer, called as the main supply and the second supply is from the intermediary to the principal. Thus, in order to fall under the ambit of Rule 9(c) of the POP Rules as an intermediary, a person should not provide the main service on his own account.        

Further, the necessary implication of the definition of intermediary is that a person, who facilitates or arranges the supply of goods between two or more persons, does not qualify as an ‘intermediary’ and consequently, is not covered within the scope of Rule 9(c). However, these provisions are far from being simple as they seem. This situation is further complicated by the interpretation given by the department as set out in the Education Guide. Let us identify some of the issues emerging from the new provisions.        

The use of words ‘facilitates’ and ‘arranges’ has, in one way, expanded the scope of application of Rule 9(c). What has been excluded from the definition is the person who provides the main service on his own account. In other words, where the intermediary provides the main service in the capacity of an agent of the principal, his service would still be considered to be intermediary service. Thus, ‘facilitation’ can even go upto providing whole of the main service by the intermediary himself, but in the capacity of an agent.        

However, another view is also possible for construing the definition of intermediary. It is a cardinal principle of interpretation (Noscitur-a-sociis) that when the meaning of a provision is not clear, it shall take colour from the context in which it is used. In the definition of intermediary, the activity to be carried out by the person should be in the nature of facilitation or arrangement. ‘Facilitation’ has to take colour from ‘arrangement’ and vice-versa. Thus, the meaning of ‘facilitation’ cannot be extended to cover those cases where the intermediary undertakes the main service itself, though in the capacity of an agent.        

In another situation, the services provided by an agent by way of identifying customers and promoting the services of a foreign party were earlier taxable as business support services, falling under Category-3 of the erstwhile Export of Services Rules wherein such services were treated as export of services and not charged to service tax. However, under the new provisions, the service of facilitating the provision of services by the foreign principal to customers in India shall be treated as provided in the taxable territory, as the agent is located in the taxable territory.          

The same services will now become chargeable to service tax and cannot be treated as export of services under Rule 6A of the Service Tax Rules, 1994 (this rule has been introduced to lay down the conditions for qualifying as export of service).          

The new provisions have also caused confusion with respect to the international in-bound roaming services provided to subscribers of a foreign telecom service provider by the Indian telecom company. It is a settled position that these services are in the nature of telecom services. While the provision of these services was covered under Category-3 of the erstwhile Export of Services Rules wherein such services were treated as export of service and not charged to service tax, the place of provision of these services under the new provisions shall be India as these consist of facilitation of the main service from the foreign telecom company to its subscriber, making the Indian company an ‘intermediary’ within the meaning of Rule 9(c).        

The explanation provided in the Education Guide for the services of estate agents also seems to be in contradiction to the statutory provisions contained in Rule 14. Rule 5 of the POP Rules governs the place of provision of services in relation to immovable properties and specifically includes services of estate agents. The Education Guide provides that since Rule 5 provides a specific description of 'estate agent', the same shall prevail. However, where the estate agents are engaged in arranging a service, say renting of immovable property, they will qualify to be ‘intermediary’ and fall under the scope of Rule 9(c). In such a case, the above clarification in the Education Guide appears to be in contradiction to the provisions of Rule 14 which provides that in case provision of service is prima facie determinable in terms of more than one rule, the later amongst them shall prevail, whereby Rule 9(c), as occurring later, should prevail.        

The agents engaged in money transfer business receive money from the foreign service providers located outside India and in turn give them to the intended recipient in India. In such a case, the question arises as to the nature of their services. In other words, whether they are merely facilitating the provision of service from the foreign service provider or providing the main service on their own account.          

Many multinational companies (MNCs) venturing in India have arrangements with Indian companies for setting up their plants etc in the nature of works contracts. These arrangements are facilitated by the subsidiary companies of such MNCs. The rules are not clear in respect of their application to these situations as the Indian subsidiary, in such cases, would be involved in facilitating works contracts, i.e. provision of services as well as supply of goods. In other words, the definition restricts itself only to those persons who facilitate the provision of services. It leads to an ambiguity regarding the place of provision of services provided by such person, i.e., whether he can be considered to be an intermediary or not.        

The above issues clearly imply that the cross-border services entailing presence of an intermediary may suffer service tax unnecessarily. Considering the same, the provisions need more clarity in terms of their application to persons facilitating cross-border services in one respect or other. Moreover, the clarification is also desirable in view of the unnecessary litigation likely to arise due to such vague provisions and the Education Guide.

[The authors are Associates, Tax Practice, Lakshmikumaran & Sridharan, New Delhi]

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