Prior to 15 March 2005, there was a complete exemption from service tax on taxable services if the payment for such services was received by the service provider in convertible foreign exchange as an inward remittance into India. Thus, in a way, it was very easy to determine the ‘export’ status of services. However, from 15 March 2005, the exemption from service tax on the basis of foreign exchange payments has been replaced by a new concept of “export of services” laid under Export of Services Rules, 2005 (Rules).

Rule 3(1) of the aforesaid Rules defines the expression “export of taxable service” and, for this purpose, segments the mass of taxable services into three categories, namely (i) services performed in relation to an immovable property situated outside India; (ii) other specified services which are physically performed outside India; and (iii) rest of services where the recipient (of services) is located outside India.

In addition, Rule 3(2), as amended on 01 March 2007, provides that in order for any services to be characterized as export services, the following additional conditions are also required to be satisfied: (a) The services are provided from India and used outside India; and (b) The payment for such services is received by the service provider in convertible foreign exchange.

It may thus be seen that the place of physical performance is not relevant for the services which are provided in relation to any immovable property. On the other hand, place of physical performance is indeed very significant for the second set of services. The matter however becomes complicated for the services falling under the third set i.e. residuary category. Typically, management consultancy services, business auxiliary services and business support services etc, fall under this category.

For such services, assuming payment is received in foreign exchange, an important question arises as to whether mere location of service recipient outside India and use of service outside India would be sufficient for holding the service as ‘export’ or is it also necessary that the service be physically performed outside India. This question becomes more significant in case of services like business support services where the aspect of physical performance appears to be more dominant in terms of perception than the aspect of consumption or use.

It is important to note here that since services covered under the residuary category are largely intangible in nature, the connotation of the concept of delivery of services has to be understood in a broader sense and not in the restricted sense of mere physical performance. This is for the reason that the delivery of intangible services cannot be said to be complete unless and until such services are received by the service recipient. This argument also finds strong support from the very basic scheme laid down in the Export of Services Rules themselves, which have clearly segregated the mass of taxable services into three distinct categories.

The Rules have clearly specified the criterion of place of physical performance, for the purpose of determining their export nature, in respect of those taxable services which are more tangible in nature and where it is reasonable and justifiable to conclude that such services are actually ‘received’ by the recipient at the very place where the physical performance thereof takes place, for example -repairs activity.

However, the legislature has also expressly recognised the important fact that there are many taxable services in respect of which the place of ‘receipt’ of service is remotely divorced from the place of physical performance. The recognition of another separate category of taxable services based on the criterion of location of immovable property also corroborates the above conclusion for the reason that such services rendered in relation to an immovable property can be, “said to have been ‘delivered’ or ‘received’ only at the place where such immovable property is situated. In fact, if the intention of the legislature had been to apply the criterion of mere physical performance to all taxable service, there was no need at all to categorize taxable services into three separate classes in the Rules and it would have been sufficient if the Rules had merely provided that if the taxable services are physically performed substantially outside India they would be treated as export services.

In this regard, it is pertinent to refer to the concept of ‘cross border rendering of services’ well recognised in the arena of international trade. The General Agreement on Trade in Services (GATS) recognises the following four modes of cross-border supply of services:

i) Supply of service from one country to another;

ii) Supply of a service from one country to a consumer of such service situated in another country;

iii) Supply of service in other country through a commercial or physical presence in that country;

iv) Supply of service in other country through movement of natural persons.

When interpreted in the light of the first two modes of cross border rendering of services, the expression ‘provided from India and used outside India’ used in the Rules clearly suggests that in order for a taxable service falling under the third category specified by Rule 3(1) to be categorised as export service, it is sufficient if such service is provided to a recipient located outside India for consumption outside India. Also, the amendment recently carried out in the Rules has removed the ambiguity which was prevailing in this regard because of the earlier phrase ‘delivered outside India and used outside India’ used in the Rules whereby it was being erroneously construed in the trade that the word ‘delivered’ would mean that the physical performance of the service must also take place outside India.

Also, the condition regarding ‘provided from India and used outside India’ is incorporated in Rule 3(2) and is applicable to all three categories of taxable services covered under Clauses (i), (ii) and (iii) of Rule 3(1), whereas the criterion of place of physical performance of service is contained in Clause (ii) alone. Therefore, the legislature’s intention is clearly not to equate ‘place of delivery’ with ‘place of physical performance’ because such an interpretation would render Clauses (i) and (ii) redundant. This fact also supports the above conclusion that in order for a taxable service falling within the purview of the residuary Clause (iii) of Rule 3(1) to be categorised as export service, it would be sufficient if such service were provided to a recipient located outside India for consumption outside India.

It can therefore be concluded that a taxable service (like business support service) falling within the purview of the residuary Clause (iii) of Rule 3(1) shall be construed to be in the nature of export service if such service is received and put to use or consumed by the service recipient outside India, notwithstanding the situs of physical performance or delivery of such service. It would however indeed be important in such cases to establish that the services were used or consumed outside India.