JUNE 16, 2015

By Anand Nainawati & Jigar Shah

ARTICLE 265 of the Constitution of India states that no tax shall be levied or collected except by authority of law. The words "levied or collected" are of great importance in indirect tax laws. Section 3 of the Central Excise Act, 1944, the charging section for central excise duty, states - "There shall be levied and collected in such manner as may be prescribed duties on all excisable goods………." In other words, Section 3 uses the words "levied and collected" with the same meaning as stipulated in Article 265 of the Constitution of India.

The word "levy" can be interpreted as imposition and assessment of tax. However, it cannot include "collection" as Article 265 has made a distinction between the words "levy" and "collection". The duty is levied as soon as the taxable event occurs, but collection may take place at anytime - either before, at the time or even after the taxable event.

Taxable event means on occurrence of which the charge is fixed. In other words, the event which fixes the liability to pay tax is the taxable event. However, the tax can be collected at a time based on convenience. Reference may be made to celebrated decision of the Supreme Court in the case of Wallace Flour Mills Co. Ltd. - 2002-TIOL-216-SC-CX which held that manufacture or production in India is the taxable event for central excise duty though duty can be collected at a later stage for administrative convenience.

So far as Service tax is concerned, prior to negative list regime, Section 66 of the Finance Act, 1994 was the charging section. Interestingly, Section 66 of the Finance Act, 1994 used the similar phrase as charging section under the Central Excise Act, 1944. It started with "There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub-clauses ……… of clause (105) of Section 65 and collected in such manner as may be prescribed."

Therefore, it can be safely concluded that the charging section under the service tax law, prior to negative list regime, used identical language as used in charging section of the Central Excise Act, 1944.

After introduction of negative list regime under the service tax law, Section 66B is the charging section. Section 66B states that there shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent (14% from 1-6-2015) on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

Except the necessary changes required after introduction of the negative list regime, the charging section is more or less same at present as it was prior to introduction of negative list regime.

It is now well settled that for applicability of levy of service tax under Section 66 (for the period prior to introduction of negative list regime) the taxable event in service tax is rendering of service. In other words, receipt of consideration (in part or full) cannot be considered as taxable event. Reference in this regard may be made to following decisions:

- Schott Glass India Pvt. Ltd. - 2009-TIOL-82-HC-AHM-ST

- Consulting Engineering Services (I) Ltd. - 2013-TIOL-60-HC-DEL-ST

- Vistar Construction Pvt. Ltd. - 2013-TIOL-73-HC-DEL-ST

Therefore, actual rendering/ provision of the service was taxable event under the provisions of Section 66 of the Finance Act, 1994 prior to introduction of the negative list regime. The courts have also held that the prevailing rate of service tax is applicable for determining tax liability when the taxable event has occurred. To illustrate, if the value of the service to be provided is Rs.1,000/- during the year 2010. However, the assessee has received Rs.500/- as advance for the said services on 01.01.2010. The rate of tax on 01.01.2010 is say for example 12%. In view of Rule 6 of the Service Tax Rules, 1994, since the assessee has received consideration for the services, the assessee will discharge the service tax on advance received @12%. The assessee actually starts rendering services on 01.04.2010 when the rate of Service tax is 10%. As per Section 66 of the Finance Act, 1994, the taxable event has occurred only on 01.04.2010 and the rate prevailing on that date would alone be considered. Therefore, can it be said that the assessee who has discharged service tax @12% on consideration received in advance for the services can adjust the excess paid service tax (if at all!) when he rendered the services actually?

Perhaps to solve this puzzle, the Central Government introduced the Point of Taxation Rules, 2011 with effect from 01.04.2011 under the powers granted to it under Section 94(2)(hhh) of the Finance Act, 1994 which enables it to frame rules to determine the date for determination of rate of tax.The main purpose of introduction of Point of Taxation Rules, 2011 was to determine the date for determination of rate of service tax. The term "Point of Taxation" is defined in the said rules as "point in time when a service shall be deemed to have been provided". Simultaneously, Rule 5B was inserted in to Service Tax Rules, 1994 which dealt with date for determination of rate of service tax.

For ease of reference, the Rule 5B is extracted below:

5B. Date for determination of rate ----- The rate of tax in case of services provided, or to be provided, shall be the rate prevailing at the time when the services are deemed to have been provided under this rules made in this regard.

However, for unknown reasons, Rule 5B was omitted from the statute book with effect from 01.07.2012.

In general, as per the provisions of Point of Taxation Rules, 2011 the point of taxation would be raising of the invoice, receipt of consideration for services (whether in advance or otherwise) or completion of services, whichever occurs earlier. In other words, a deeming fiction was created which determined the rate of tax applicable on occurrence of event like raising of invoice, receipt of consideration for services or completion of services and the assessee is liable to make payment of service tax accordingly.

Consequential changes were also made to Rule 6 of the Service Tax Rulesmaking the assessee liable to make payment of tax when the service is deemed to be provided as per the Point of Taxation Rules, 2011. In other words, the liability to pay service tax was fastened as soon as the point of taxation (earlier of the raising of invoice, receipt of consideration for the services or completion of the services) has occurred. This was a paradigm shift indeed because under the earlier provisions (before introduction of Point of Taxation Rules, 2011) the liability to pay tax was fastened at the time when consideration for the services was received.

With effect from 28.05.2012 a new Section 67A was introduced in Finance Act, 1994. The margin note of the said section stated as date of determination of rate of tax, value of taxable service and rate of exchange. For ease of reference, the said Section as introduced on 28.05.2012 is reproduced below:

67A. The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Explanation: For the purposes of this section, "rate of exchange" means the rate of exchange referred to in the Explanation to Section 14 of the Customs Act, 1962 (52 of 1962).

The reference to rate of exchange would make anybody think that this section is applicable only in case of cross border transaction of services. However, the authors could not find any material in public domain to support such assumption. The authors have also come across industry practice between two Indian companies wherein one company raises the invoices for rendering of services in foreign currency and then converts the same in to Indian Rupees as per the rules/ accounting policies in this regard. There is no statutory provision in Finance Act, 1994 or Service Tax Rules, 1994 prohibiting raising of invoice in foreign currency even though the transactions are between two Indian companies/ persons.

The issue here is that Section 67A states that the rate of service tax would be the rate in force as applicable at the time when the taxable service has been provided or agreed to be provided. Unlike the Point of Taxation Rules, Section 67A does not use any deeming fiction for point of taxation. It simply states that the rate applicable would be when the service has been provided or agreed to be provided.

If we compare the language used in Section 67A with earlier charging Section 66 (i.e. prior to introduction of Negative List regime) it has close resemblance to the extant determination of taxable event is concerned as the language used is very much similar.

Therefore, the problem is even though as per the provisions of Point of Taxation Rules, 2011 the point of taxation can be deemed as earlier, of raising of invoice, receipt of payment for services or completion of services, Section 67A still states that the rate of tax applicable would be the rate of tax when the services were provided or agreed to be provided. In other words, the provisions of Section 67A and the provisions of Point of Taxation Rules, 2011 are directly in conflict with each other.

It is a well-settled principle in law that the rules cannot travel beyond the statutory provisions themselves. Therefore, a new controversy will arise in a case where there is a change in rate of service tax. If it is increased (as it is always happens!) then there is a possibility that the assessee may contend that the rate of tax would be applicable when he actually rendered the services and not to be determined as per the provisions of Point of Taxation Rules, 2011 as the Section would prevail over the rules.

Further, as mentioned above, the language used in Section 67A is similar to Section 66 (earlier charging section) and, therefore, the decisions referred to above would equally apply or useful for interpretation of provisions of Section 67A also. If it is interpreted in that way then certainly it will give rise to another controversy of determining the rate of tax applicable for the services whether the rate prevailing at the time of rendering of service or determinable as per the provisions of Point of Taxation Rules.

[The authors are respectively Partner and Joint Partner, Lakshmikumaran & Sridharan, Ahmedabad and the views expressed are personal]