Does DTAA Overrides Service Tax in India?
Import of Service
The Import of Service means that the Service which is being provided by a Service Provider who is located in Non-Taxable territory and the service recipient is located in taxable territory. In such circumstances, the Service Receiver is liable to pay service tax as per Sr. No. 10 of Notification 30/2012-ST dated 20-06-2012 subject to the exemptions granted under Item No. 34 of Notification No. 25/2012-ST dated 20-06-2012.
A question which brings many minds to dilemma is that whether the Indian Government can impose tax on matters of extra territorial jurisdiction. In this regard, it is pertinent to note that Article 245(2) of the Indian Constitution states that
"No law made by Parliament shall be deemed to be invalid on the ground that it would have extra territorial operation."
It is worthwhile to note that the law should have territorial nexus with India without which the said Act shall be ultra vires as the matter is no longer res integra and the same has been decided in case of Electronics Corporation of India v. CIT [(1989) 183 ITR 43 (SC)].
Application of DTAA on Service tax
There is a general perception that DTAA is applied only to Income Tax Act, 1961 but this notion is not good in all cases. The DTAA can also be applied to Service Tax. In this connection, we must note the meaning of income. In common parlance, income refers to both gross receipts and net receipts. And it must be noted that DTAA applies to gross receipts in many cases such as Article 12 of DTAA is on 'gross amount of royalty and fees for technical services', Article 10 is on 'gross dividend'.
In view of the afore-said, it can be said that some of the agreements entered by India with other countries are not specifically for income tax but also on similar taxes. For instance, Article II of DTAA with Australia Notified vide GSR 60(E), dated 22-1-1992 states that
"This Agreement shall also apply to any identical or substantially similar taxes which are imposed under the federal law of the Commonwealth of Australia or the law of the Republic of India after the date of signature of this Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any substantial changes which have been made in the laws of their respective States relating to the taxes to which this Agreement applies."
Hence, imposing service tax on gross receipts of royalties, technical services, etc. is taxing the same indirectly which cannot be taxed directly (Quando aliquid prohibetur ex directo, prohibetur et per obliquum). In this regard, it can be noted that Hon'ble Supreme Court in case of Jagir Singh vs. Ranbir Singh [1979 SCC (1) 560] held that
"In order to cross the hurdle imposed by Section 397(3) it was suggested that the revision application before the High Court could be treated as an application directed against the order of the Sessions Judge instead or an one directed against the order of the Magistrate We do not think that it is permissible to do so. What may not be done directly cannot be allowed to be done indirectly, that would be an evasion of the statute. It is a "well-known principle of law that the provisions of an Act of Parliament shall not be evaded by shift or contrivance" (per Abbott C.J. in Fox v. Bishop of Chester(1) "To carry out effectually the object of a Statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined" (Maxwell, 11th edition, page 109). When the Sessions Judge refused to interfere with the order of the Magistrate, the High Court's jurisdiction was invoked to avoid the order of the Magistrate and not that of the Sessions Judge. The bar of Section 397(3) was, therefore, effectively attracted and the bar could not be circumvented by the subterfuge of treating the revision application as directed against the Session Judge's order."
Hence, if we appoint any lawyer for handling a case in Australia then it would not be taxable in India because of the application of make available clause. Hence, in our view no service tax should be levied on the recipient of such service as the DTAA overrides the domestic laws.
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- By Aditya Singhania & Nischal
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