By TIOL News Service

MUMBAI, DEC 17, 2014: A marathon 65 paragraphs order consisting of 20150 words.

All because a Practising Advocate, inter alia challenged the provisions of section 65(105) (zzzzm) of the Finance Act, 1994 as substituted by the Finance Act, 2011 as being null and void and ultra vires .

This is what the said provision reads -

(zzzzm) (i) to any person, by a business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner;

(ii) to any business entity, by any person, in relation to representational services before any court, tribunal or authority;

(iii) to any business entity, by an arbitral tribunal, in respect of arbitration.

Explanation - For the purposes of this item, the expressions "arbitration" and "arbitral tribunal" shall have the meanings respectively assigned to them in the Arbitration and Conciliation Act, 1996; (26 of 1996)

++ The TRU letter D.O.F.No.334/3/2011-TRU dated 28.02.2011 clarifies as under -

3. Alteration or expansion in the scope of existing services

A number of existing services are being modified or substituted as follows:

3.6 Services by legal professionals [section 65 (105) (zzzzm)]: The scope of the existing service is being expanded to include:

(i) Services of advice, consultancy or assistance provided by a business entity to individuals as well;

(ii) Representational services provided by any person to a business entity; and

(iii) Services provided by arbitrators to business entities.

Services provided by individuals to other individual will remain outside the levy.

++ Notification 25/2012-ST, Dated: June 20, 2012

The Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the following taxable services from the whole of the service tax leviable thereon under section 66B of the said Act, namely:- 

6. Services provided by-

(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

The primary ground on which the said provisions are challenged is as mentioned below -

+ The understanding of the Petitioner and the association of advocates supporting him is that the amendment to Finance Act as referred above levies, assesses and recovers Service Tax from Advocates and that would be violative of the constitutional guarantee of justice to all. It is their submission that justice cannot be secured unless a cause or a legal proceeding is represented properly and effectively before a Court. It is the duty of the Advocates to represent the cause of the litigant before the Court of law to the best of their ability. It is submitted that the Advocates are engaged not only for aid and advice but also for appearance and representation of a case in Court. It is not possible for litigants to argue their cases before the Court of law because they may involve complicated factual and legal issues. In such circumstances, when administration of justice is a sovereign and regal function of the State and Advocates are part of the same, then, they cannot be said to be rendering any service and of the nature envisaged by the Service Tax Act/Finance Act. Legal profession has not been understood from times immemorial as a profit making activity or venture. It is not a business or trade. It is a solemn duty which is performed for the litigants including the State who are major stakeholders in the judicial system. If, therefore, Advocates are approached by litigants so as to properly, completely and effectively represent them in the Court of law, then, a tax cannot be levied by the State on them. That would amount to denying the litigant access to justice. The guarantee of cheap, effective and expeditious justice to the common man is, thus, defeated. The levy of Service Tax imposes a heavy additional burden on litigants and also disables them from approaching the Court. An Advocate is an officer of the Court. It is for this reason that the fees received by an Advocate is regarded as a mere honorarium and not as a matter of contractual right. It is also for this reason that it has been held by the Supreme Court that an Advocate cannot exercise any right of lien over his clients' papers and documents which are lying with him, for the purpose of compelling the client to pay the Advocate's fees.

+ The said Amendment violates Article 14 of the Constitution inasmuch as the said amendment discriminates between representation made on behalf of an individual and representation made on behalf of a business entity. This makes it manifestly evident that the said amendment is highly oppressive, unjust and unreasonable and the same is palpably arbitrary and is accordingly violative of fundamental rights guaranteed Article 14, 19(1)(g) and 21 of the Constitution. The purpose to exempt representation and arbitration on behalf of individuals seems to be to cater to the need of Article 39A of the Constitution of India recognizing equal justice and free legal aid; however the legislature seems to have lost sight of the fact that eventually it is an individual who is affected economically even if Appearance, and Arbitration are on behalf of Corporations and Partnership firms. The said Amendment also runs contrary to the provisions of the Finance Act, 1994 which provide for levy of Service Tax on provision of taxable service. There cannot be any levy, in the absence of there being a service& the levy fails on this ground alone.

+ In order to attract the liability for payment of Service Tax, there should be a service provider and a recipient of service. In the case of the Petitioner, the relationship between the Advocate and the litigant before the Court is that of a representative of a litigant. Therefore, the amendment inserted is clearly ultra vires the Constitution of India. The impugned amendment brings within the purview of Service Tax appearances made by Advocates before Arbitral Tribunals also. Alternative Dispute Resolution is a well-recognized mechanism meant to aid to clear back logs of cases in the Courts. Hearing and adjudication by Arbitral Tribunal can, therefore, never be "service" in law.

+ It is also submitted that the Advocates appear in the Court to represent their clients, but in effect assist the Court to dispense justice. The fact that the assistance rendered by Advocates is to bring in harmony and peace in the society and resolve disputes between the parties, even by applying the fiction, to consider the representation provided by Advocates as service would be highly unreasonable and absurd.

+ The levy of Service Tax on advisory, consultancy and assistance services to the extent it relates to levy of Service Tax on legal advice by Advocates is invalid as a Lawyer is merely advising or opining on the position of law and is only assisting the State in making the public aware about what the law on a particular subject is and, therefore, is only rendering a service to the State. The levy of Service Tax on legal services goes against the principle of Article 39A of the Constitution of India which amongst other things states that the State has to secure that opportunities for securing justice are not denied to any citizen by reason of economic or other disabilities. Levy of Service Tax would be a disability which would restrict the opportunity of securing justice as the same makes legal services that much costlier economically.

+ It imposes a duty on the State to secure that the operation of the legal system promotes justice on a basis of equal opportunity and in particular, provides that the State shall provide free legal aid to ensure that opportunities for securing justice are not denied to any citizen by reason of economic or other disabilities. Access to justice is recognized as a fundamental right. Hence levy of Service Tax on Legal Services violates the fundamental rights and is, therefore, violative of the Constitution of India.

+ It is submitted that without prejudice to the above assuming that Service Tax is leviable on the legal profession, the requirement of issuing invoices within 14 days of completion of service as per the Service Tax Rules 1994 serves no purpose as under the point of Taxation Rules 2011 services covered under clause 65(105)(zzzzm) are taxable only on receipt basis. Hence to the extent of activities covered under section 65(105) (zzzzm), the provisions of Rule 4A of the Service Tax Rules to the extent they require invoices to be issued within 14 days of completion of the legal assistance is ultra vires the Finance Act 1994 and Article 19(1) (g) of the Constitution of India.

+ It is further submitted that the notification 30/2012-ST dated 20.06.2012 w.e.f 01.07.2012 laying down as under should be given retrospective effect -

This notification notifies the following taxable services and the extent of service tax payable thereon by the person liable to pay service tax for the purposes of the said sub-section, namely -

(iv) provided or agreed to be provided by,-

(A) an arbitral tribunal, or

(B) an individual advocate or a firm of advocates by way of legal services, or

(C) Government or local authority by way of support services excluding,-

(1) renting of  immovable property, and

(2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994,

to any business entity located in the taxable territory;

The extent of service tax payable thereon by the person who  provides the service and the person who receives the service for the taxable services specified in (I) shall be as specified in the following Table, namely:-

Table

The High Court in an elaborate order observed thus -

On vires:

+ We cannot agree and for more than one reason. The legislature by inserting such provision has neither interfered with the role and function of an advocate nor has it made any inroad and interference in the constitutional guarantee of justice to all. The services provided to an individual client by an individual advocate continues to be exempted from the purview of the Finance Act and consequently Service Tax but when an individual advocate provides service or agrees to provide services to any business entity located in the taxable territory, then, he is included and liable to pay Service Tax. That is because the legislature was aware that poor and needy section of the population requires advice, consultancy or assistance in any branch of law, if he requires legal advice, aid and assistance, then, that should be available to him at times immediately and cheaply. He should not be burdened with a tax to be levied on the advocate for providing such services. Therefore, if the legislature thought it fit to exclude an individual advocate and rendering the above services to individuals, so long as he is rendering services to those who cannot afford to pay heavy professional fees and charges being individuals that the legislature deemed it fit not to include in the tax bracket the individual advocates. These advocates may be rendering services to the needy and specially women and children at Village, Taluka, District, Town and even at city levels. It is, therefore, apparent to us that the legislature while making the above distinction did not in any manner overlook the constitutional guarantee and as envisaged in the preamble to the Constitution of India., so also Article 21 and 39A thereof, the legislature made a distinction and which appears to us to be completely reasonable. The classification between those who can afford professional legal services and are ready to pay the fees or charges demanded without seeking any reduction or concession and those who cannot pay legal fees but can at best bear meagre expenses has been made. This classification has a reasonable nexus with the object sought to be achieved. It cannot be said that while introducing this provision, the legislature did not take into account the economic realities. The economic realities are that even, legal services are rendered in an organized manner. There is not only an individual operating and functioning as an advocate but there is a firm or association of advocates operating on business principles and functional not only in metro towns and cities but even in those places which can be termed as district town and cities. When advocate is group or organize themselves by making huge investments in acquiring immovable properties for professional work, heavy overheads, in the form of clerical and support staff, with facilities of cabins or rooms, then, legal services are rendered to organized groups or business entities predominantly. They may be of the nature of advice, consultancy or further acting and appearance in Courts and Tribunals. These persons can very well pay the fees and charges without any demur or complaint. It is when services are rendered to such entities and persons by not individual advocates but those working on business lines, then, if they are brought within the net of taxable services and service tax is levied on them, they can hardly complain. Their right to carry on legal profession and as per their choice can hardly be said to be taken away much less adversely affected.

++ In taxing legislations and statutes there is a greater latitude and discretion in the Government.

++ We do not see any substance in the challenge based on violation of the doctrine of equality enshrined by Article 14 of the Constitution of India.

Equality:

++ Justification and reasons for the levy do not indicate that unequals have been treated equally. We do not find any basis or foundation in the complaint inasmuch as imposition of such levy does not burden the litigant or the consumer of justice. We do not find any substance in the complaint that the profession of advocates and legal profession itself has been treated on par with commercial or trading activities or dealings in goods and other services. Merely because of the role of the advocate, it does not mean that his position as an officer of the Court and part and parcel of administration of justice is in any way undermined leave alone interfered with. The Advocates and legal practitioners are known to pay professional taxes and taxes on their income. They are also brought within the purview of service tax because their activities in legal field are expanding in the age of globalization, liberalization and privatization. They are not only catering to individuals but business entities. If it is found that the advocates are catering to affluent and rich class of litigants and recipients of legal services, then, the tax on the services rendered to them is definitely within the permissive sphere of legislation. That cannot be faulted.

+ Thus, what holds good for chartered accountants and architects must equally apply to other professionals such as advocates, and who too are well conscious of their status.

+ We find that post globalization, liberalization and privatization, the legal sector has been involved in several issues particularly to advice the foreign institutional investors and multinational corporations keen on investing in infrastructure and other sectors in India. If they are keen on doing business in India and equally the Indian Corporate sector experiencing new challenges including expansion of existing capacities that there is enormous scope for advocates, law firms and organized law groups. The horizon is ever expanding. In such circumstances, we find that laws are undergoing a change. That change is visible if one peruses the provisions and amendments to corporate laws. Similarly, the enactments such as Securities and Exchange Board of India Act, 1992, Insurance Regulatory and Development Authority Act and Competition Act etc., result in further opportunities to the advocates of providing varied services to business entities. Thus, corporate law and corporate lawyers witnessing radical changes and reforms that the Government or the Ministry of Finance thought it fit to levy tax on these services rendered by advocates but without disturbing their essential and core professional duty. Therefore, the service tax net has been expanded and to include legal services provided to business entities.

Commercialisation, Branding & Marketing:

+ Now, advocacy is no longer taking up and presenting or arguing any cause before a Court of justice. It is much more than that. It is actively participating in and involving oneself in market strategies, aligning oneself exclusively with large business groups and also serving their interests.

+ Today, like any other service provider Advocates are pushing themselves by rigorous marketing and advertisement, branding themselves as specialists in Corporate Law, Intellectual and other property rights, divorce law and not Matrimonial and Family Laws etc.

+ If they are part of and have entered the market, exhibiting all trends prevailing therein, then, it is surprising that they are agitated, worked up at being termed service providers and taxed as such.

+ None grudges their achievements, success in providing diverse services and sometimes under one roof but what surprises us is their reaction and response at being termed as additional revenue generating source by the State.

+ The State looks at the organised legal set up alone this way and at the same time excludes individual Advocates rendering legal aid, advice and assistance to the poor, impoverished and needy. This distinction or segregation of services made by the Parliament does not fall foul of the constitutional guarantee of equality.

+ We do not feel that this aspect (that Advocate is an officer of the Court and part and parcel of administration of justice) has been ignored or brushed aside by the Parliament. Rather by a rational and intelligible differentiation the Parliament has proceeded to levy and impose service tax on legal services or services in the field of law rendered to business entities by individual Advocates or a firm of Advocates. The differentiation as maintained and made takes note of the commercialisation of the practice of law. The service rendered to an individual litigant is not of the above nature and, therefore, he is rightly left out.

+ The classification between service provided to business entities and individuals, therefore, cannot be said to be illusory. The classification has a definite nexus and with the object sought to be achieved. If that is to explore and expand the sources of revenue and by widening the tax net, then, it is achieved by bringing within the fold the aforementioned services. There is, therefore, no violation of the constitutional mandate. The classification cannot be termed as arbitrary, discriminatory, unfair, unreasonable and unjust.

No suffering:

+ The case laws cited by the appellant were distinguished.

+ Incidentally, no material has been placed before Bench by the Petitioners which would indicate that for a brief period from the time the impact of levy of service tax fell on them and until the issuance of the notification number 30 of 2012 dated 20th June, 2012 the Advocates suffered in any manner.

+ Applying these principles to the facts and circumstances before us, we do not find that levy of service tax on a limited category and class of professionals, namely Advocates, the burden of which does not fall on them but on the receiver of the service, can be said to be violative of the guarantee or right under Article 19(1)(g) of the Constitution of India.

+ The judgment in the case of Manoharan V/s. Sivarajan and others reported in (2014) 4 SCC 163 emphasizes that Article 39A not only includes free legal aid by the appointment of counsel for litigants but also includes ensuring that justice is not denied to litigating parties due to financial difficulties. That aspect is taken care of in the present tax set up by excluding from the tax net the individual litigants and services provided to them by individual advocates. Therefore, there is no infraction of the constitutional mandate.

Retrospectivity - Notification No.30/2012-ST- It is not possible to accept this argument because the categories of advocates mentioned in these Notifications cannot claim an exemption from the tax and as of right. The legislature having decided to grant the exemption and equally to shift the burden on to the recipient from a particular date, namely, prospectively and not retrospectively by itself does not mean that the doctrine of equality has been violated. If individual advocates and those providing services either individually or collectively to business entities of the classes specified in the two Notifications No.25 and 30/2012 are incomparable, not equally situated, then, all the more, this argument has no basis. The legislature has a choice and very wide in matters of taxation. It can include and exclude from the tax bracket persons or classes of persons. It is free to decide on a cutoff date. Equally it is free to legislate retrospectively in matters of taxation. Similarly, if it decides that a particular provision or an enactment will have prospective operation, the person on whom the burden falls cannot complain that the legislature must give such provision retrospective effect. There is no such right and particularly in matter of taxation. In such circumstances, we do not find any merit in this argument either.

The Petitions were dismissed.

In passing : Paragraphs 46 & 63 relating to the High Court's observation on nobility of the profession, corporate luxury, five star hotels, air conditioned conference rooms and the opportunity to make money post retirement; the Ex-Chief Justice story make an interesting read.

The icing: We had to say and observe all this because Mr… vehemently contended that Advocates cannot be compared with traders and businessmen nor their services can be equated with those rendered by commercial establishments, transporters, property agents etc. - para 49.

(See 2014-TIOL-2279-HC-MUM-ST)