By TIOL News Service

NEW DELHI, FEB 04, 2013: THE petitioner is an association of Chartered Accountants, registered as a society in Delhi. The prayer in the petition was for:

(a) quashing of the circular No.158 /9/2012-ST dated 08.05.2012 and circular No.154 /5/2012-ST dated 28.03.2012 as null and void and ultra vires the Constitution of India and/ or the provisions of the Finance Act, 1994;

(b) issuance of a writ or order or direction in the nature of a writ declaring that under the provisions of the Finance Act, 1994, the taxable event is the rendition of the service and accordingly the rate of tax payable is the rate in force on the date of providing the service.

The petitioner is an association of chartered accountants; services rendered by chartered accountants are taxable services u/s 65(105)(s) of the Act. According to sub-rule (c) of Rule 7 of the Point of Taxation Rules, the date on which the payment for the services of the chartered accountants ( which is one of the 8 specified services therein) is made or received will be deemed to be the date on which the services were provided or rendered.

With effect from 01.04.2012, the rate of Service Tax was enhanced from 10% to 12%. The question before the Court was what would be the rate of tax where (a) the service is provided by the chartered accountants prior to 01.04.2012; (b) the invoice is issued by the chartered accountants prior to 01.04.2012 but (c) the payment is received after 01.04.2012.

CBEC had clarified vide the above referred two Circulars that the provisions of Rule 7(c) as they existed on 31.03.2012 ( Rule 7 has been amended with effect from 01.04.2012 deleting the reference to the 8 specified services) would apply and therefore the service tax rate applicable would be 12% in the above situations. The petitioners challenged the CBEC Clarifications as contrary to the provisions of the Finance Act, 1994.

After hearing both sides, the High Court held:

++ A comparison of Rule 7 as it existed both before and from 01.4.2012 shows two significant changes. The first change is that while the old Rule referred to recipients of service only in respect of services notified under Section 68(2) and did not make any reference to the recipients of the service in either Clause (a) or Clause (c), the new Rule covers only the recipients of service in respect of services notified under Section 68(2). The second significant change is that the reference to services covered by sub-rule (1) of Rule 3 of Export of Services Rules, 2005 in Clause (a) of the old Rule and the reference to individuals or proprietary firms or partnership firms providing taxable services referred to in sub-clauses (g), (p), (q), (s), (t), (u), ( za ) and ( zzzzm ) of clause 105 of Section 65 of the Finance Act, 1994 in Clause (c) of the old Rule does not find any mention in the new Rule. The result is that the new Rule 7 inserted w.e.f . 01.04.2012 was not applicable to services rendered by chartered accountants under Section 65(105)(s) of the Act. Thus the position is that the new Rule 7 with effect from 01.04.2012 does not provide for the determination of point of taxation in respect of services rendered by chartered accountants. Both the circulars which are impugned in the present writ petition proceed on the erroneous basis that Rule 7 inserted w.e.f . 01.04.2012 covers the services rendered by chartered accountants. Circular No.154 when it states that invoices issued on or before 31.3.2012 shall continue to be governed by Rule 7 as it stood before 01.04.2012 is erroneous because on and from 01.04.2012, the old Rule 7 was no longer in existence, having been replaced by new Rule 7. Circular No.158 , insofar as it states that in the case of the eight specified services (which includes the services of chartered accountants), if the payment is received or made, as the case may be, on or after 01.04.2012, the service tax needs to be paid at 12% is again without any statutory basis. The new Rule 7 does not cover the services which were earlier referred to in Clause (c) of Rule 7 (including services of chartered accountants) as it existed up to 31.3.2012. The circular seems to have overlooked this crucial aspect.

++ Rule 4 of the Point of Taxation Rules, 2011 which has continued even after 01.04.2012 is clearly the answer. This Rule applies notwithstanding anything contained in Rule 3 which provides for the determination of point of taxation. As per Rule 4, whenever there is a change in the effective rate of tax in respect of a service, the point of taxation shall be determined in the manner set out in the Rule. Clause (a) provides for a case of taxable service which was provided before the change in effective rate of tax has taken place. Clause (b), in contrast provides for a case of a taxable service which has been rendered after the change in the effective rate of tax has taken place. w.e.f . 01.04.2012, there has been a change in the effective rate of tax from the earlier 10% to 12%. In the petitioner's case, the dispute is only with reference to the services provided by the chartered accountants before 01.04.2012. Clause (a) of Rule 4 would therefore govern its case.

++ The result of the discussion will be that where the services of the chartered accountants were actually rendered before 01.04.2012 and the invoices were also issued before that date, but the payment was received after the said date, the rate of tax will be 10% and not 12%. The circulars in question have not taken note of this aspect, and as noted earlier have proceeded on the erroneous assumption that the old Rule 7 continued to govern the case notwithstanding the introduction of the new Rule 7 which does not provide for the contingency that has arisen in the present case.

++ In view of the foregoing discussion the circulars are quashed as being contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011. The Point of Taxation Rules, 2011 have been notified in exercise of the powers conferred upon the Central Government under Clause (a) and Clause ( hhh ) of sub-section (2) of Section 94 of the Finance Act, 1994 and they are also required to be placed before both the Houses of Parliament under sub-section (4) of Section 94. They thus have the force of law. The circulars have to be in conformity with the Act and the Rules and if they are not, they cannot be allowed to govern the controversy.

(See 2013-TIOL-81-HC-DEL-ST)