Levy of Service Tax on Foreign Tourists Operator Services is Unconstitutional: Delhi HC [Read Judgment]

A division bench of the Delhi High Court in a petition filed by the Indian Association of Tour Operators, held that the levy of service tax on foreign tourists operator services is ultra vires to the Finance Act, 1994, insofar as export of tour operator services include non-taxable services provided by tour operators.

The bench while sriking down Rule 6A (1) read with Section 6A (2) of the Service Tax Rules, held that the services provided by Indian tour operators to foreign tourists during the period 1st July 2012 to 1st July 2017, which has been paid for in convertible foreign exchange would not be amenable to service tax.

The High Court, further refused to award prospective overruling so that the central government does not have to refund the service tax collected on the services provided by Indian tour operators to foreign tourists.

Before the High Court, Indian Association of Tour Operators, challenged the constitutional validity of Rule 6A of the Service Tax Rules, 1994, concerning ‘Export of services’.

The validity of Section 94 2 (f) of the Finance Act is also challenged before the Court on the ground that it gives unguided and uncontrolled power to the central government to frame rules regarding ‘provisions for determining export of taxable services’.

Section 65 (105) of the FA defined ‘taxable service’ to mean “any service provided or to be provided” to a whole range of persons as mentioned in clauses (a) to (zzzzw). Clause (n) of Section 65 (105) of the Finance Act, which is relevant for the present petition, stated that the provision of service to any person “by a tour operator in relation to a tour” would be a taxable service. Section 66 of the FA provided for the ‘charge of service tax.” Again, relevant for the present petition is the fact that Section 66 provided inter alia that service tax at the rate of 12% of the value of the taxable service referred to in Section 65 (105) (n) of the FA shall be levied and “collected in such manner as may be prescribed.”

The bench noticed that Rule 6A (1) (d) treats even services provided outside the taxable territory i.e. where the place of provision of service is outside India, as an export of ‘taxable’ service. Since such service by virtue of Section 66B read with Section 65 (51) and (52) read with Section 64 (1) and (3) of the FA is not amenable to service tax in the first place, and is therefore not ‘taxable’ service, Rule 6A is ultra vires the FA. Even Section 94 (2) (hh) of the FA permits central government to determine when there would be an export of ‘taxable service’ and not ‘non-taxable service.’ Something which is impermissible under the FA cannot, by means of the rules made thereunder, be brought within the net of service tax.

Based on the above findings, the bench ruled the following;

1. Rule 6A (1) read with Section 6A (2) of the ST Rules, insofar as it seeks to describe export of tour operator services to include non-taxable services provided by tour operators, is ultra vires the FA and in particular Section 94 (2) (f) of the FA and is, therefore, invalid.
2. Section 94 (2) (f) or (hhh) of the FA does not empower the central government to decide taxability of the tour operator services provided outside the taxable territory. They only enable the central government to determine what constitutes export of service, the date for determination of the rate of service or the place of provision of taxable service.
3. Section 66 C of the FA enables the central government only to make rules to determine the place of provision of taxable service but not non-taxable service.

Read the full text of the Judgment below.