The Supreme Court upheld that services provided outside India, when paid in convertible foreign exchange, do not attract service tax, confirming the validity of the CESTAT's decisions on tax liability.

JUDGMENT :

NAGARATHNA, J.

Delay condoned.

Leave granted.

1.1 These Civil Appeals have been filed by the Revenue, i.e. the Service Tax Department, being aggrieved by various orders passed by the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”, for the sake of convenience).

2. The orders passed by CESTAT in all these appeals have been in favour of the respondents-assessees. The CESTAT has held that the services provided by the respondents-assessees have been in fact exported out of India. Consequently, service tax is not payable by the assessees on such services so exported, vide Rule 4 of the Export of Service Rules, 2005 (“Rules”, for the sake of brevity). It has also held that the assessees had rightly availed payment of CENVAT credit on inputs and input services used for providing such services vide Rule 5 of the Rules.

3. The period under consideration in these appeals range from the year 2003 till the year 2014. During this period, there were several amendments made to the law governing the taxability of export of services, which can be discussed at this stage itself.

4. The policy governing taxability of export of service was initiated in the year 1999 and in the year 2003, it was reiterated. Since service tax is a destination-based consumption tax, services that were exported out of India were not meant to be taxed. The benchmark in the year 1999 was, whether payment was received in convertible foreign exchange. Ultimately, in the year 2010, the benchmark again came to be fixed as receipt of payment in convertible foreign exchange.

5. A brief outline of the amendments made from the year 1999 till 2012 are highlighted as under:

I. From 1999 to 2003:

5.1 During the period from the year 1999 to 2003, any taxable service for which payment was received in convertible foreign exchange was exempted from payment of service tax. A notification in this regard was issued vide Notification No.6/99-S.T., dated 09.04.1999, whereby exemption was made in respect of the taxable services specified in sub-section (48) of Section 65 of the FINANCE ACT , 1994. This Notification was however rescinded vide Notification No.2/2003-Service Tax, dated 01.03.2003, the reason being that the exemption would be of no consequence as whatever service was exported out of India was in any case outside the scope of levy of service tax. This was because service tax is location-based and whatever service is exported abroad, is outside the scope of service tax. Consequently, Circular No.56/5/2003-S.T., dated 25.04.2003 was issued, clarifying that since service tax is destination-based consumption tax, no such tax was leviable on export of services.

5.2 Subsequently, Notification No.21/2003-S.T., dated 20.11.2003 was issued, providing exemption from payment of service tax on export of services in terms of sub-section (105) of Section 65 of the FINANCE ACT , 1994, provided taxable services to any person in respect of which payment is received in India is received in convertible foreign exchange.

5.3 When the position stood thus, the Government of India decided to formulate Rules regarding export of services.

II. From 2005 to 2010:

5.4 The Rules were introduced vide Notification No.9/2005 dated 03.03.2005 which categorized services into three categories as per Rule 3 of the said Rules, which is described as under:

i. Category I related to immovable property and stated that if the specified services were provided in relation to immovable property situated outside India, then the said service would be treated to have been exported;

ii. Category II related to performance-based services and stated that if the specified services were either wholly or partly performed outsi