DECEMBER 02, 2014

By Narendra Kumar Singhvi

THE law governing Service Tax in India has evolved since its introduction in 1994. The coverage of the Service Tax law has increased manifold along with its resultant contribution to the government coffers. Nonetheless the apprehensions in the service industry about the uncertainty of law are still alive and have grown rather complex. The focus of this article is to highlight the practical problems caused due to the conflict between the established legal position regarding the taxable event and that of the point of taxation. To be specific, this controversy started with the mixing of provisions relating to levy and those relating to collection of Service Tax in 2005, by adding the words 'to be provided' in Section 65(105) of Finance Act, 1994.

To explain the controversy in a better manner, we can take the example of telecommunication services. With the advent of technology and the competition in the industry, new methods of rendering telecom services have evolved and so has the confusion amongst the tax-teams of the telecom companies. For example, a person may get recharge of a particular value on his prepaid connection, which is valid for a period of four months. In a similar way, advance rentals can be paid by a post-paid customer who actually avails services at a later point of time. In between the recharge/payment of advance and the actual availment of services by way of making calls etc, the rate of Service Tax may undergo a change. In such cases, the confusion prevails regarding the rate of tax at which the company is liable to discharge its liability of Service Tax.

In Association of Leasing & Finance Service Companies v. Union of India - 2010-TIOL-87-SC-ST-LB, the Hon'ble Supreme Court laid down that in case of Service Tax, the taxable event is the rendering of service. The Delhi High Court in Commissioner of Service Tax v. Consulting Engineering Services (I) Private Limited - 2013-TIOL-60-HC-DEL-ST and Vistar Construction (P) Limited v. Union of India - 2013-TIOL-73-HC-DEL-ST has taken a similar view. The High Court has further held that the rate of tax, applicable at the time of such taxable event, shall be material.

However, if one takes a close look at the statutory provisions, the position is relatively different. Section 66 of the Finance Act, 1994 (for short 'the Act') provided for levy of Service Tax on the value of all services referred to in various sub-clauses of Section 65(105) of the Act. Section 65(105) started with the words 'provided or to be provided'. Thus, even where a person agrees to render a service to another, the same shall be covered within the scope of Section 66.

The position under the negative list is not different. Section 66B of the Act provides for levy of Service Tax on the value of all services, other than those specified in the negative list of services, provided or agreed to be provided. The charging provision, thus, provides for charge of Service Tax on all services, whether provided or agreed to be provided. As soon as one party agrees to render a service to another, the same shall be within the four corners of Section 66B.

These provisions are further supplemented by the Point of Taxation Rules, 2011 (for short 'POT Rules'). The POT Rules are, more or less, in conformity with the charging provisions and contemplate for payment of Service Tax at the time when the agreement to render services crystallizes, though it precedes the actual rendition of service.

As held by the Hon'ble Supreme Court in Collector of Central Excise v. Vazir Sultan Tobacco Co Limited, - 2002-TIOL-215-SC-CX, the charging section creates the levy of a tax and thus, the taxable event thereof. The taxable event and the levy fixed under the charging section cannot be shifted by any provision. It is only the collection of the duty, which is validly levied, which can be shifted to any stage.

Under the current legal provisions, the taxable event is the agreement to render services, even if it precedes the actual rendering of services. The rate of tax applicable at the time of payment of advance under an agreement and that applicable at the time of actual rendering of service may differ. In a given situation, where a person pays advance towards a service and later no services are rendered, he would still be covered within the scope of the charging provisions. In the example given above, where a person pays advance rentals towards telecom services but loses his connection thereafter but before the actual use of services, the levy of Service Tax would still be attracted.

A useful reference can be made to the recent decision of the Hon'ble Tribunal in Bharati Tele-ventures Limited v. Commissioner of Central Excise, - 2013-TIOL-1532-CESTAT-MUM, wherein, in the context of telecom services, it was held that the rate of tax applicable at the time of rendering of service is relevant.

The Tribunal followed the principle that the taxable event is rendering of service, but did not examine the question as to what is the actual taxable event in case of telecom services. In other words, the talk-time available with a mobile user may be used by him over a period of time. Thus, in such a case, the question is whether the taxable event shall occur every time the user utilizes the talk-time by making a call?

Construing the plain language of the legal provisions in a strict manner, it is evident that in case of Service Tax, the taxable event is the agreement to render service, even though the actual rendering of service follows such event. In such cases, the only saviour for an assessee, who never renders a service thereafter, are the decisions referred above read with the methods of adjustment contemplated under Rule 6 of the Service Tax Rules, 1994. The larger question would still be whether the determination of taxable event in such manner under the current provisions is in line with the constitution scheme of legislative powers and the test of reasonableness.

(The author is Senior Associate, Lakshmikumaran & Sridharan, Delhi.)