JULY 02, 2012

By Joseph Prabakar

AS part of the Negative List of Services concept, the Government, vide Notification No 25/2012 dated 20.06.2012, has specified 39 categories of transactions/activities which are exempt from Service Tax.

I reproduce below Entry Sl No 6 of Notification No 25/2012 dated 20.06.2012, which provides for exemption for Legal Services rendered by Advocates, Law Firms and Arbitral Tribunal.

‘6. Services provided by-

(a) an arbitral tribunal to -

(i) any person other than a business entity; or

(ii) a business entity with a turnover up to rupees ten lakh in the preceding financial year;

(b) an individual as an advocate or a partnership firm of advocates by way of legal services to,-

(i) an advocate or partnership firm of advocates providing legal services;

(ii) any person other than a business entity; or

(iii) a business entity with a turnover up to rupees ten lakh in the preceding financial year; or

(c) a person represented on an arbitral tribunal to an arbitral tribunal;'

In the present discussion, as we are concerned only with services rendered by Advocates/ Law Firms,I reproduce below Clause (b) of Entry Sl No 6 of Notification No 25/2012 dated 20.06.2012.

(b) an individual as an advocate or a partnership firm of advocates by way of legal services to,-

(i) an advocate or partnership firm of advocates providing legal services;

(ii) any person other than a business entity; or

(iii) a business entity with a turnover up to rupees ten lakh in the preceding financial year; or

I List of transactions/ activities which are exempt from Service Tax

On an analysis of each limb of Clause (b) of Entry Sl No 6 of Notification No 25/2012 dated 20.06.2012, it may be noted that the following services rendered by Individual Advocates are exempt from payment of Service Tax from 01.07.2012.

(i) Legal Services provided by an individual as an advocate to another individual advocate

(ii) Legal Services provided by an individual as an advocate to a partnership firm of advocates providing legal services.

(iii) Legal Services provided by an individual as an advocate to any person other than a business entity.

(iv) Legal Services provided by an individual as an advocate to a business entity with a turnover below Rs 10 Lakhs in the previous financial year.

Similarly, the following services rendered by PartnershipFirm of Advocates are exempt from payment of Service Tax from 01.07.2012.

(i) Legal Services provided by a partnership firm of advocates to an individual advocate.

(ii) Legal Services provided by a partnership firm of advocates to another partnership firm of advocates.

(iii) Legal Services provided by a partnership firm of advocates to any person other than a business entity.

(iv) Legal Services provided by a partnership firm of advocates by way of legal services to a business entity with a turnover below Rs 10 Lakhs in the preceding financial year.

II Meaning of Legal Services

Please note that originally, in Notification No.12/2012 dated 17.03.2012, the term used was “ Services provided by an Individual as an Advocate ”. Now, under Notification No.25/2012 dated 20.06.2012, the term used is “ Services Provided by an Individual Advocate byway of Legal Services” . Therefore it may be noted that the exemption under Notification No.25/2012 dated 20.06.2012 would apply to individual advocates for rendering legal services only. Legal services would include Advice, Consultancy, Technical Assistance in legal matters and Appearance before Courts and various judicial and quasi judicial authorities.

For example, if an individual advocate in practice is also engaged in real estate consultancy/share broking etc., then the exemption under Serial No.6 of Notification No.25/2012 dated 20.06.2012 would be restricted to receipts towards rendering legal services only. In other words, exemption would not be available for receipts towards real estate consultancy/share broking or any other activity.

III Concept of Business Entity

As regards exemption for services provided to ‘ persons other than Business Entity ', it may be noted that when an individual advocate renders any service to any person who receives such services in his capacity as an individual, then such legal services would be exempt from payment of Service Tax. To illustrate, if an Individual Advocate appears in the Family Court for some personal issue for, say, Mr. Gowtham, the said services would be exempt from payment of Service Tax.

Now, if the same Individual Advocate renders services toMr. Gowtham,Proprietor of Gowtham & Co, relating to the business of Gowtham & Co, then the said legal services would be charged to service tax. However, under the reverse charge method, in terms of Sl No 5 of Notification No. 30/2012-ST, dated June 20, 2012, the liability to pay service tax would be shifted to Gowtham & Co which is a Business Entity which receives the said legal services.Thus, normally,legal services rendered by an individual advocate to a Business Entity would be chargeable to service tax in the hands of the service receiver. Therefore, while an individual advocate rendering legal services would not be liable to pay service tax under any circumstances, legal services rendered by an individual advocate to Business Entity (subject to Clause (iii) of Entry Sl No 6) would be taxable. Thus, as a natural corollary, the question of an individual advocate obtaining registration under service tax would simply not arise.

IV Exemption based on Turnover below Rs 10 Lakhs and reverse charge method

I will now analyse the exemption provided for Business Entity with a turnover below Rs.10 lakhs. Please note that, normally legal services rendered by an individual advocate to a Business Entity would be liable to service tax and the liability to pay service tax would be on the Business Entity receiving the said legal services. The liability to pay service tax by the Business Entity is under the reverse charge method in terms of Sl No 5 of Notification No. 30/2012-ST, dated June 20, 2012. Thus, technically a small businessman, irrespective of his turnover, would be liable to pay service tax under reverse charge method for making any payment to an individual advocate for legal services. In fact, this is the position presently under GTA services. In order to mitigate the difficulty, as a benevolent measure, the Government had provided for an exemption from service tax for those Business Entities whose turnover in the previous financial year is less than Rs.10 lakhs.

I would illustrate this by way of an example. Mr.Srinivasan, an individual Advocate renders legal services to two Business Entities, namely A & Co Pvt Ltd and B& Co both in July 2012. The turnover of A & Co Pvt Ltd for the year 2011-12 is Rs.10 Crores and the turn over of B & Co for the year 2011-12 is Rs.8 Lakhs. In the above scenario, the services rendered by Mr Srinivasan to A & Co Pvt Ltd would be taxable and the person liable to pay service tax would be A & Co Pvt Ltd. However, services rendered by Mr Srinivasan to B & Co would be exempt and hence neither Mr Srinivasan nor M/s B & Co would be liable to pay service tax on this transaction since the turnover of M/s B & Co for the previous financial year is below Rs.10 lakhs.

The crucial point to note here is that irrespective of the turnover of the Business Entity to whom the services are rendered, ( A & Co Pvt Ltd or B & Co) the individual advocate, would not be liable to pay service tax. Secondly, the turnover limit of Rs.10 lakhs fixed for the Business Entity would apply to the respective Business Entity which receives the legal services.

A doubt had arisen as to whether service tax would be applicable if the turnover limit of the Business Entity receiving the legal services exceeds Rs.10 lakhs. It may be noted that the turnover limit prescribed under Sl No 6 (b) (iii) of Notification No.25/2012 dated 20.06.2012 is only with reference to the Business Entity and there is no requirement of payment of service tax and registration with service tax authority for an individual advocate even where the turnover of the receiving Business Entity exceeds Rs.10 lakhs. In other words the turnover limit of Rs.10 lakhs would only facilitate small businesses to avoid registration and payment of service tax under reverse charge method when the small businessman pays a fee for legal services. So, it is for a Business Entity to take a decision as to whether they should pay Service Tax or not under reverse charge method under Notification No 30/2012, when the Business Entity pays a fee for legal services.

Please note that the Law Firms are also on the same footing as an individual advocate and the analysis and examples would apply equally to Law Firms. In fact, those law firms who are presently registered and paying Service Tax can surrender their registration and stop making payment of Service Tax on and from July 1, ,2012.

(The Author is a Chennai based Advocate)