By TIOL News Service

NEW DELHI, FEB 01, 2013: THE main issue in these writ petitions is with regard to the applicability of the rate of service tax in respect of the Works Contract Service which is defined in Section 65(105)(zzzza) of the Finance Act, 1994. The case of the petitioner is that the said services were rendered prior to 01.03.2008 when the rate of service tax on the said service was increased from 2% to 4%.

It is the case of the respondents that by virtue of the impugned instruction dated 28.04.2008, the rate of service tax is to be determined based on the date of receipt of payment and not on the date of rendition of service.

In F.No.545/6/2007-TRU dated 28.4.2008, the TRU clarified that Service tax shall, therefore, become chargeable on receipt of payment and on the amount so received for the service provided or to be provided, whether or not services are performed.

The High Court held that this view is clearly wrong. The High Court referred to the Supreme Court decision in Association of Leasing & Financial Service Companies Vs. UOI - (2010-TIOL-87-SC-ST-LB) wherein the Supreme Court had categorically held, "Thus, the impugned tax is levied on these services as taxable services. It is not a tax on material or sale. The taxable event is rendition of service."

The High Court observed,

"Therefore, the taxable event, in so far as service tax is concerned, is the rendition of the service. That being the position, the taxable events in the present writ petition had admittedly occurred prior to 01.03.2008. At that point of time the rate of service tax applicable in respect of the services in question was 2% and not 4%, which came into effect only on or after 01.03.2008. In both the writ petitions the date of receipt of payments was subsequent to 01.03.2008 but that would not make any difference because it is not receipt of payment which is the taxable event but the rendition of service."

The High Court hastened to add,

"It should also be mentioned that at that point of time neither was Rule 5B of the Service Tax Rules, 1994 in effect nor was Section 67A of the Finance Act, 1994 inasmuch as the latter provision was inserted in 2012 which came in effect from 28.02.2012. Furthermore, even Rule 4(a)(i) of the Point of Taxation Rules, 2011 was not applicable to the facts of the present case in as much as those rules also came into effect much later in 2011."

The High Court referred to its own recent decision in Commissioner of Service Tax Vs. Consulting Engineering Services (I) Pvt. Ltd. decided on 14.01.2013 - 2013-TIOL-60-HC-DEL-ST, where it was held the taxable event as per the Finance Act, 1994 was the providing or rendition of the taxable services.

The High Court held,

"the rate of tax applicable on the date on which the services were rendered would be the one that would be relevant and not the rate of tax on the date on which payments were received."

So, the High Court declared the TRU instruction as invalid.

"Regarding the issued raised by the Revenue of the petitioner having an alternative remedy by way of appearing in the adjudicatory process as also by way of an appeal as provided under the statute, the High Court observed – "However, we do not agree with this proposition inasmuch as the basis of the show cause notice as well as the adjudication order is the instruction dated 28.04.2008. Unless and until that instruction is set aside the statutory authorities would continue to apply that instruction and the petitioner would have no remedy before the said authorities. Since the instruction dated 28.04.2008 has been held by us to be invalid, the show cause notice pertaining to the subject matter indicated by us as also the adjudication order would also have to go and it is for this reason that we have entertained these writ petitions and allowed the same."

Writ Petitions allowed.

(See 2013-TIOL-73-HC-DEL-ST )