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I. INCREASE IN THE RATE OF TAX - EFFECTIVE
DATE
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FACTS
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M/s.
Surprised Ltd.’s main business is acting as an advertising agent
to many clients. They are registered under Chapter V of the Finance
Act, 1994 ("Act"), the law governing service tax, under the category
of "advertising agency" and pay service tax as applicable.
-
They
have charged service tax @ 5% on certain invoices issued after
14.5.2003 since it was pertaining to services provided before
14.5.2003. To their surprise they were issued a show cause notice
("SCN") by the Excise department asking them to pay service tax
@ 8% [instead of @ 5%] which was the rate applicable after 14.5.2003.
The department have relied on circular No. 56/2003 dated 25.4.2003
which states that the rate of 8% would apply to all invoices issued
on or after 14.5.2003. The relevant para of the circular is reproduced
below :
"5. A further question raised is relating to payments receivable
in foreign exchange for the services performed prior to March,
1, 2003 when the rate of service tax applicable was 5 % but payments
are received after March 1, 2003. The enhancement of the rate
of service tax from 5% to 8% would be applicable only when the
Finance Bill is passed. If payments are received in the aforesaid
case after the Finance Bill is passed, the rate of tax applicable
would be 5% so long as the billing has been made prior to the
date of passing of the Finance Bill. If the billing is made subsequent
to the date of the passing of the Finance Bill, the service tax
would be applicable at the enhanced rate of 8%."
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ISSUE
Whether the rate of service tax should be 5% or 8% in case of
services provided before 14/5/2003 but invoices for which are issued
after 14.5.2003 ?
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SUBMISSIONS
Analysis of relevant statutory provisions viz., section 66 leads to
the conclusion that services provided before 14.5.2003 would attract
service tax @ 5% and servies provided on or after 14.5.2003 would
attract service tax @ 8%.
- Section 66 is the charging section and also
provides for the rate of service tax. The said section as it stood
prior to and after 14.5.2003 i.e. the date on which the Finance
Bill, 2003 was enacted is reproduced below :
- Section 66 as it stood prior to 14.5.2003
is reproduced below :
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"66. Charge of service tax.-
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On and from the date of commencement of this
Chapter, there shall be levied a tax (hereinafter referred
to as the service tax), at the rate of five per cent. of the
value of the taxable services referred to in sub-clauses (a),
(b) and (d) of clause (90) of section 65 and collected in
such manner as may be prescribed.
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With effect from the date notified under section
85 of the Finance (No. 2) Act, 1996 (33 of 1996), there shall
be levied a service tax at the rate of five per cent. of the
value of the taxable services referred to in sub-clauses (c),
(e) and (f) of clause (90) of section 65 and collected in
such manner as may be prescribed.
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With effect from the date notified under section
88 of the Finance Act, 1997 (26 of 1997), there shall be levied
a service tax at the rate of five per cent. of the value of
the taxable services referred to in sub-clauses (g), (h),
(i), (j), (k), (l), (m), (n) and (o) of clause (90) of section
65 and collected in such manner as may be prescribed.
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With effect from the date notified under section
116 of the Finance (No. 2) Act, 1998 (21 of 1998), there shall
be levied a service tax at the rate of five per cent. of the
value of the taxable services referred to in sub-clauses (p),
(q), (r), (s), (t), (u), (v), (w), (x), (y) and (z) of clause
(90) of section 65 and collected in such manner as may be
prescribed.
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With effect from the date notified under section
137 of the Finance Act, 2001, there shall be levied a service
tax at the rate of five per cent. of the value of the taxable
services referred to in sub-clauses (za), (zb), (zc), (zd),
(ze), (zf), (zg), (zh), (zi), (zj), (zk), (zl), (zm), (zn)
and (zo) of clause (90) of section 65 and collected in such
manner as may be prescribed.
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With effect from the date notified under section
137 of the Finance Act, 2001, there shall be levied a service
tax at the rate of five per cent. of the value of the taxable
services referred to in sub-clauses (zp), (zq), (zr), (zs),
(zt), (zu), (zv), (zw), (zx), (zy), (zz), and (zza), of clause
(90) of section 65 and collected in such manner as may be
prescribed."
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Section 66 as it stands after 14.5.20031 is
reproduced below :
"66. Charge of service tax. —
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There shall be levied a tax (hereinafter referred
to as the service tax) at the rate of eight per cent. of the
value of the taxable services referred to in sub-clauses (a),
(b), (c), (d), (e), (f), (g), (h), (i), (j), (k), (l), (m),
(n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y),
(z), (za), (zb), (zc), (zd), (ze), (zf), (zg), (zh), (zi),
(zj), (zk), (zl), (zm), (zn), (zo), (zp), (zq), (zr), (zs),
(zt), (zu), (zv), (zw), (zx), (zy), (zz) and (zza) of clause
(105) of section 65 and collected in such manner as may be
prescribed.
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With effect from such date as the Central Government
may, by notification in the Official Gazette, appoint, there
shall be levied a service tax at the rate of eight per cent.
of the value of the taxable services referred to in sub-clauses
(zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzj),
(zzk) and (zzl) of clause (105) of section 65 and collected
in such manner as may be prescribed."
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Section 65(90)(e) / 65(105)(e) which defined "taxable
services" in the relevant period in the context of advertising
provided as follows :
"(105)"taxable service" means any service provided,-
(a) to (d) ……
(e) to a client, by an advertising agency in relation to advertisement,
in any manner;"
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On a perusal of the above sections it would be
noticed that section 66, the charging section, as stated above
in para 3.2 and 3.3 provides for levy of service tax on the value
of taxable services. But ‘taxable services’ means ‘any
service provided to a client’. Hence the taxable event
which gives rise to the charge of service tax is the provision
of "taxable service" i.e. ‘services provided’. The rate of service
tax is to be charged at 5% / 8% on the value of the taxable service
i.e. ‘service provided’. Thus, the liability and quantum of service
tax gets crystallized when the service is provided. Thus, it is
clear that –
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If services are provided before 14.5.2003 they
would attract service tax @5%;
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If services are provided on or after 14.5.2003
they would attract service tax @8%.
Reliance on Trade Notice No. 58/2003 dated 20th
May, 2003 issued by the Commissioner of Central Excise, Mumbai
– I - Services provided before 14.5.2003 attract service tax @
5% and services provided on or after 14.5.2003 attract service
tax @ 8%.
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In this respect attention is drawn to the Trade
Notice No. 58/2003 dated 20th May, 2003 issued by the Commissioner
of Central Excise, Mumbai – I which states in Point no. A as under
:
"A. Enhancement of rate of Service Tax in
respect of existing Servies
In respect of the existing services, which are
already being taxed, the enhanced rate of 8% will apply with effect
from 14.5.2003. In other words, all taxable services rendered
on or after 14.5.2003 shall attract 8% Service Tax……
Further, the following clarifications are issued
:
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Services rendered prior to 14.5.2003 for which
payment is received after 14.5.2003 would attract Service
Tax at the rate of 5% only as the levy of Service Tax is
on the event of rendering of a particular service, and consequently
the rate of tax which was in force at the time of rendering
the said service shall alone be applicable. Accordingly
Services rendered prior to 14.5.2003 would attract 5% while
Services rendered on or subsequently to 14.5.2003 would attract
Service Tax at the rate of 8%.
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Services to be rendered on or after 14.5.2003
for which payment is received in advance, prior to 14.5.2003
:
As the service is going to be rendered on or after 14.5.2003,
service tax shall be payable at the rate of 8%. The differential
3% may also be collected from the customers by raising a supplementary
invoice."
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Thus, the words mentioned in bold in the trade
notice cited above makes it very clear that –
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The levy of service tax is on taxable service
rendered;
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The rate in force at the time of rendering
the said service would apply.
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Hence the above trade notice gives the correct
legal position and substantiates the contention that the point
at which services are rendered is more important than the point
at which the billing takes place. In the case under consideration
the rate of service tax when the services were rendered or provided
was 5% which has been correctly applied by M/s. Surprised Ltd.
Analogy to be drawn from paras 3.1 and 3.2 of the
Circular No. 62/11/2003 dated 21st August, 2003 issued by the
Central Board of Excise and Customs ("Board") which clarifies
the point of time at which levy of service tax is applicable.
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Paras 3.1 and 3.2 of the Circular No. 62/11/2003
dated 21st August, 2003 issued by the Central Board of Excise
and Customs state as under :
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"Maintenance or repair services rendered under
contracts entered into prior to 1-7-2003 are exempted from
service tax if the bills are raised, and payment also made,
prior to 1-7-2003 (notification No.11/2003-ST dated 20-6-03).
In this context a doubt has been raised as to whether service
tax would still be chargeable in cases where though the bills
are raised, or payment made, after 1-7-2003, but the service
was rendered prior to 1-7-2003.
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It is a basic principle that no tax can be
charged except under authority of law. Thus, if the levy of
service tax on a particular service comes into force on a
given date, that service will not be taxable if rendered before
that date. The levy of service tax on "Maintenance or repair
service" has come into force on 1-7-2003. Accordingly any
maintenance or repair service rendered prior to 1-7-2003 will
not be taxable, irrespective of when the bills are raised
or payment made. This will apply to other services as well
which were rendered prior to the imposition of service tax
on them"
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The circular states the basic principle which
is stated in para 3.5 viz., that the situs of taxation is the
‘provision of services’ or ‘rendering of services’ and not receipt
of monies or the issue of invoices / bills. In effect the circular
states that the rendering of services is relevant and not when
the bills are raised or payments received. The principles enunciated
in this circular would apply equally in the case of application
of rate of service tax. Hence the rate as applicable at the point
in time when the services are rendered / provided would be the
relevant or correct rate and not the rate at any other point of
time. Thus, in the relevant case under consideration the correct
rate applicable would be 5% when the services were rendered and
not 8% when the bill was issued.
If taxable event is taken as the issue of bill
instead of providing or rendering of service it would result in
an anomalous situation where bills are issued much before the
services are rendered or provided.
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If a view were to be taken that rate of tax as
applicable at the time of issuing the bill is to be considered
then in cases where bills are issued before 14th May, 2003 but
services are provided after 14th May, 2003 the rate of tax would
be 5% and not 8%. This would not be correct. Further in the case
of services which have been made applicable from 1st July, 2003
there would no service tax on services provided after 1st July,
2003 if the bills are issued before 1st July, 2003. This is not
the intention of the legislature. In this context attention is
drawn to notification No.11/2003-ST dated 20-6-03 issued in the
context of maintenance or repair services which exempts maintenance
or repair services provided prior to 1-7-2003 if the bills are
raised, and payment also received prior to 1-7-2003. In this respect
Circular No. 59/9/2003 dated 20.6.2003 clarifies as follows :
"2.3.1 maintenance contracts entered into before 1st July 2003:
There are cases where maintenance contracts are entered into for
a period of more than one year. Vide notification No.11/2003-
Service Tax, dated 20th June 2003 for maintenance contracts entered
into prior to 1st July, 2003, exemption has been provided to that
part of the value of the service for which bill/invoices have
been raised and the amount has actually been received prior to
the 1st July, 2003. For such contracts, all subsequent payments
or payments made against invoice issued subsequent to the 1st
July 2003 will be chargeable to service tax. Similar will be situation
for payments made for continuing services."
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Hence if a view is taken that the issue of the
bill is the relevant date, then the above notification was not
necessary since it anyway pertained to services for which bill
was issued before 1.7.2003 the date when the levy was applicable.
Thus, the date of rendering the services is more relevant than
the date of issue of bill. Hence, the services provided before
14.5.2003 would attract service tax at 5% and not at 8% even if
bills are issued after 14.5.2003.
Service tax applicable even if bills are not
issued
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The trade notice no. 20/2002 dated 23.5.2002 issued
by the Commissioner of Central Excise, Delhi - II has clarified
as follows :
"5. What happens when both the services have been rendered and
the payments for it also realized but as yet no bills have been
raised on the client for the service rendered?
Conceptually, the important elements involved are
:-
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Rendering of the service
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Determination of the amounts chargeable as
payment for the service/s rendered.
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Ascertainment of the amount of service tax
chargeable / recoverable @ 5% of the gross value of the taxable
services rendered and
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Receipts of sums involved by the service provider.
Thus, if a formal bill/invoice is the only thing
that is not yet issued, while the other two elements have finality
about them, then the service tax amount involved should be paid
to the credit of the Central Government as mandated. If even a
final determination of the amounts chargeable as payment for the
service rendered has not been made then it is advisable for the
assessee to go in for a provisional assessment and make his return
in the Form ST-3A."
Thus, the relevant matter is when the services
are provided and not when the bill is issued.
The statutory provisions and subsequent circulars
are more correct and relevant than Circular No. 56/5/2003 dated,
25-4-2003 issued by the Central Board of Excise and Customs as
relied in the SCN.
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The SCN has relied on Circular No. 56/5/2003 dated,
25-4-2003. In this connection the following is to be noted.
Firstly, the said circular was issued by the Central
Board of Excise and Customs in the context of export of services.
Secondly, the Trade Notice No. 58/2003 dated 20th
May, 2003 issued by the Commissioner of Central Excise, Mumbai
– I [refer para 3.6] and the subsequent circular viz., Circular
No. 62/11/2003 dated 21st August, 2003 [refer para 3.9] clearly
identify the provisions of law and fix the taxable event as the
point when the service is provided. These circulars and section
66 being more in line with the correct legal position would prevail
over circular no. 56/5/2003 dated 25.4.2003.
Thirdly, billing is purely an administrative action
on the part of the assessee. The statute viz., the legal provisions
providing for the charge of service tax (section 66) no where
mentions the act of billing as the point of time when the rate
of service tax is to be applied. In fact they refer only to the
application of the rate on the value of ‘taxable service’ which
as stated earlier means any services provided to a client.
Thus, the rate of service tax which prevails at the point of time
when the service is provided would be the relevant rate to be
applied. This view is also in line with all the subsequent circulars
and trade notices mentioned above.
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In view of the above submissions the SCN’s Reliance
on Circular No. 56/5/2003 dated, 25-4-2003 issued by the Central
Board of Excise and Customs is not relevant to the facts of the
case.
Conclusion
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In the case under consideration the services have
been provided before 14.5.2003. Hence the applicable rate of service
tax is 5% since the date when the services are provided is more
relevant than the date of issue of the bills as explained above
in detail vide paras 3.1 to 3.15. Accordingly, service tax at
5% has been correctly charged and paid. Therefore there is no
short payment of tax as alleged in the SCN.
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II. |
LEGAL AND TAXATION SERVICES PROVIDED
BY A PRACTICING CHARTERED ACCOUNTANT - WHETHER LIABLE UNDER BUSINESS
AUXILIARY SERVICES ? |
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FACTS
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M/s.
Harrassed & Co. is a firm of Chartered Accountants and are
subject to service tax under the category of "Practicing Chartered
Accountants" w.e.f 16th October 1998. Pursuant to Notification
No. 59/98 – Service Tax dated 16-10-1998 Practicing Chartered
Accountants are liable for payment of service tax only on certain
specified services such as accounting, auditing, etc. mentioned
in the said notification. They also provide legal and taxation
services which are not liable for service tax. However, the Excise
department has issued a show cause notice (SCN) asking them why
service tax should not be levied on the legal services (such as
income-tax representation , sales tax representation, etc) provided
by M/s. Harrassed on the premise that they are liable for service
tax under the category of business auxiliary services.
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ISSUE
Whether legal and taxation services provided byPracticing Chartered
Accountants would be liable for tax under the category of Business
Auxiliary Services ?
- SUBMISSIONS
Nature of legal services
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The
scope of our services in the area of income-tax, sales tax, service
tax, excise, etc. involves :
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Representation
before the tax authorities and Tribunals;
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Advice
on taxation and legal matters;
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Filing
returns
The
above services involves interpretation of law and compliance related
procedures Hence essentially the service would be of a legal nature
and hence would be considered as legal services.
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Now
the issue to be examined is whether legal services would be considered
as ‘business auxiliary services’.
Relevant
statutory provisions relating to business auxiliary services
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Section
65(105)(zzb) of the Act defines taxable service in the context
of "business auxiliary services" as follows :
"(105)
"Taxable service" means any service provided –
(a)
to (zza)…..
(zzb)
to a client, by a commercial concern in relation to business auxiliary
service."
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Section
65(19) of the Act defines "Business auxiliary service"2 as follows
:
"(19)
"business auxiliary service" means any service in relation to
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promotion
or marketing or sale of goods produced or provided by or belonging
to the client; or
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promotion
or marketing of service provided by the client; or
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any
customer care service provided on behalf of the client; or
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any
incidental or auxiliary support service such as billing, collection
or recovery of cheques, accounts and remittance, evaluation
of prospective customer and public relation services, and
includes services as a commission agent but does not include
any information technology service.
Explanation-For
the removal of doubts, it is hereby declared that for the purposes
of this clause "information technology service" means any service
in relation to designing, developing or maintaining of computer
software, or computerized data processing or system networking,
or any other service primarily in relation to operation of computer
systems."
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In
order to attract service tax under this category, the service
must be in relation to -
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promotion
or marketing or sale of goods produced or provided by or belonging
to the client; or
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promotion
or marketing of service provided by the client; or
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any
customer care service provided on behalf of the client; or
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any
incidental or auxiliary support service such as billing, collection
or recovery of cheques, accounts and remittance, evaluation
of prospective customer and public relation services.
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The
first three clauses encompass services that are primarily ‘customer
centric’ i.e. pertaining to client’s customer viz., services in
relation to marketing or selling for a client. Clause (iv) of
section 65(19) of the Act, deals with any "incidental or auxiliary
support service". The word "incidental" means something appertaining
to another which is primary. Similarly, the word "Auxiliary" also
means something which is subsidiary. The word "support" means
to enable to continue or to back up. Thus, the words "incidental
or auxiliary support service" would mean services which appertain
to or are subsidiary backup services to something which is more
primary. The words "such as" then follows the words "incidental
or auxiliary support services" and after the words "such as" there
is an enumeration of services which may come under this clause.
The use of the words "such as" means that the services under this
clause would have a quality which characterises the enumeration
following the words "such as". The services enumerated are billing,
collection or recovery of cheques, accounts and remittance, evaluation
of prospective customer and public relation services. These services
are generally known to be ba ck
up or support services of the marketing or selling function in
an organization. Thus, "incidental or auxiliary support service"
would cover a service which is a backup service for the marketing
or selling function of an organization.
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Hence, the entire services which would fall
within this category of service would be those services which
relate to the marketing or selling function of an organization.
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This view is substantiated by para 2.1.33
of Circular No. 59/8/2003, dated June 20, 2003 issued by the Central
Board of Excise and Customs (CBEC) for clarifying the scope of
services falling within the definition of business auxiliary services.
The said para gives an illustrative list of activities falling
within this category which is enumerated as under :
- Evaluation of prospective customers,
- Processing of purchase orders,
- Customer management,
- Information and tracking of delivery
schedules,
- Accounting and processing of transactions,
- Operational assistance for marketing,
- Formulation of customer service and pricing
policies,
- Managing distribution & logistics;
- Getting a customer,
- Verification of prospective customer.
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Further Circular No. 80 dated 17.9.2004 issued
by the CBEC explaining inter alia the extension of the scope of
the business auxiliary services by the Finance (No.2) Act, 2004
states that "The pre-budget definition of Business auxiliary Service
covered services,
which relate to the sale and marketing side of a business."
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On
a perusal of the above it is evident that the entire range of
services which would fall within this category of service would
be those services which relate to the marketing or selling function
of an organization. Legal services can certainly not be considered
as relating to marketing or selling function of an organization.
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Lastly it is to be noted that if legal and
taxation services were construed to fall within the purview of
business auxiliary services then the entire legal fraternity viz.,
advocates, lawyers and solicitors would be liable for service
tax which it appears is not the intention. If the intention was
to tax lawyers then there would have been a separate classification
titled "legal services".
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In view of the above, legal and taxation services
provided by M/s. Harrassed & Co., Practicing Chartered Accountants
are not liable for service tax under the category of "business
auxiliary services".
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