APRIL 05, 2016

By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate and R Vaidyanathan, M.Com, M.Phil, Consultant

AS students of law, we know that any taxing statute has to specifically deal with the three aspects, viz. the taxable event, the rate of tax and the point in time when the tax liability is to be discharged. It would seem that there are certain critical issues arising out of the proposed incorporation of sub-section (2) in Section 67A of the Finance Act, 1994 read with the Point of Taxation Rules, 2011 ('POTR').

Clause 148 of the Finance Bill, 2016 has proposed the following amendment to section 67A, viz.

148. In the 1994 Act, in section 67A, the existing section shall be numbered as sub-section (1) thereof, and after sub-section (1) as so renumbered, the following sub-section shall be inserted, namely:-

"(2) The time or the point in time with respect to the rate of service tax shall be such as may be prescribed".

The existing Section 67A reads as under:

Date of determination of rate of tax, value of taxable service and rate of exchange.

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 determined in accordance with such rules as may be prescribed.

We should read these developments in the light of the amendment to Notification No. 18/2011-ST dated 1-3-2011 [notifying the Point of Taxation Rules, 2011] by notification 10/2016-ST dated 01.03.2016 wherein, the word 'sub-section (2) of Section 67A and' have been inserted, to take effect from the date of the Presidential assent.

We should also keep Para 12 of the TRU circular No. D.O.F. No. 334/8/2016-TRU dated February 29, 2016 which reads as under:

Quote:

12. The Point of Taxation Rules (POTR).

The Point of Taxation Rules, 2011 have been framed under provisions of clause (a) and (hhh) of sub-section (1) of section 94, now specific powers is also being obtained under section 67A to make rules regarding point in time of rate of service tax. Thus, any doubt about the applicability of service tax rate or apparent contradiction between section 67A and POTR would be taken care of. Therefore, consequent modifications have been done in POTR.

(a) Rule 5 of POTR applies when a new service comes into the service tax net. Although in the case of new levy, provisions of Chapter V of the Finance Act, 1994, and rules made thereunder, are invariably made applicable in relation to the levy and collection of the new levy. However, doubts have been raised regarding its applicability in case of new levy. Therefore, an Explanation is being inserted in Rule 5 stating that the same is applicable in case of new levy on services.

(b) Further, in rule 5 of POTR, it is provided that in two specified situations the new levy would not apply. Another Explanation is being inserted therein stating that in situations other than those specified where new levy or tax is not payable, the new levy or tax shall be payable.

The above changes shall come into effect from 1st March, 2016.

Unquote

A combined reading of the existing Section 67A of the Finance Act, 1994 [which, in effect is the sub-section (1) of the section, post amendment] with the un-amended POTR would clearly indicate that, while the POTR is to be referred to, to determine as to when (i.e at what point in time) service tax is payable, Section 67A is to be referred to, to determine the rate of service tax based on when the service has been provided or to be provided. POTR never had the statutory backing, to determine the point of time when service has been provided, which is sought to be made through the insertion of sub-section (2).

While on the subject, there are three aspects connected to the subject involving levy of service tax, viz. (i) power conferred under the Finance Act for levy of tax [under Section 67A], (ii) power conferred to make Rules [under Section 94(2)(hhh)], and (iii) the actual Rule deriving its legal validity from the statutory provisions in the Act.

Apart from inserting sub-section (2) to Section 67A, the Government should also have amended Section 94(2) (hhh) to incorporate reference to Section 67A(2) apart from the existing reference to Section 66C. In the absence of this amendment, it would seem that the POTR, which derives its statutory backing from Section 67A(2) and Section 94(hhh) [which, as aforesaid, does not refer to Section 67A(2)] can still be challenged as being ultra vires the Finance Act, 1994.

Be that as it may, by going in for these amendments, the Government would seem to have scored a major self-goal, inasmuch as, it can now be held that, the Point of Taxation Rules, 2011, sans the insertion of sub-section(2), did not have the statutory backing to determine the rate of tax.All show-cause notices issued under the current version of the POT Rules can now be treated to be invalid and illegal, as the Government itself has conceded that it derived the power to determine the time or the point in time with respect to the rate of service tax in the POTR only from the proposed sub-section (2) of Section 67A. And, being an insertion and not a substitution, the effect of the insertion of sub-section(2) to Section 67A can validate the POTR, if at all, only from the date of the Presidential assent. This position is fairly conceded in Para 12 of the above mentioned TRU Circular.

Taking this discussion further…

A simple reading of the existing sub-section (1) as proposed to be renumbered and the proposed sub-section(2) would indicate that, these two are mutually contradictory. While sub-section (1) makes an absolute statement that the rate, value and rate of exchange vis-à-vis the taxable service would be as the one as is applicable when the taxable service has been provided or agreed to be provided. Now, the sub-section (2) as proposed, states that the time or the point in time with respect to the rate of service tax shall be such as may be prescribed. One can see that the sub-section (2) as proposed to be inserted is in contrast to the sub-section (1), inasmuch as, the rate of service tax would be the one applicable as per the time or point in time to be prescribed (under the POTR), which is against the wordings used in sub-section (1), which states that the rate of service tax would be the one that is prevalent on the date of rendering the service or on the date on which the agreement to render the service has been entered into.

The least that the Government of the day could have done is to add a non-obstante clause, which would have resulted in sub-section (2) overriding sub-section (1).

The net impact of all of these amendments/insertions is that, the POTR, insofar as the determination of the rate of tax is concerned, would seem to lack the legislative backing during the period prior to the grant of the Presidential assent which would legalize sub-section (2) of Section 67A of the Finance Act, 1994. Even after Section 67A in its expanded version is enforced, the very fact that the two sub-sections are seemingly contradictory to each other, is bound to create a lot of litigation even in the future, as the assessee would be entitled to rely on sub-section (1) while the Government would seek to rely on the POTR which has been issued under sub-section (2) and only the Courts can solve this issue.

Before concluding…

One is reminded of the issues involving levy of service tax on reverse charge mechanism under the then prevailing Section 66A of the Finance Act, 1994. The Courts had struck down the levy of service tax under the RCM for the period prior to 18.04.2006 on the basis that the power to levy such tax came to the Government only with the introduction of Section 66A. In our view, a similar fate awaits the POTR, for the period prior to the date of the Presidential assent.