2013 (2) TMI 55 - HC - Service Tax

Rate of Service Tax on Chartered Accountant and other services - Determination of rate of Service tax where services were provided before 1.4.2012 and payment is received on or after 1.4.2012 Increase in rate of service tax w.e.f. 1.4.2012 from 10% to 12%. Circular no. 154 and 158 states that rate of service tax will be 12% - Amendment to Point of Taxation Rules, 2011 - Constitutional validity. 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stood before 01.04.2012 is erroneous because on and from 01.04.2012, the old Rule 7 was no longer in existence, having been replaced by new Rule 7.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. In the present case rule 4 is applicable - 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 have to be in conformity with the Act and the Rules and if they are not, they cannot be allowed to govern the controversy. Thus circulars are quashed as being contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011 as Circular which is contrary to the Act and the Rules cannot be enforced Commissioner of Central Excise, Bolpur vs Ratan Melting & Wire Industries - 2008 (10) TMI 5 - SUPREME COURT OF INDIA Decided in favor of assessee.

Summary

Issues Involved:
1. Validity of Circular No.158/9/2012-ST dated 08.05.2012 and Circular No.154/5/2012-ST dated 28.03.2012.
2. Determination of the taxable event under the Finance Act, 1994 and the applicable rate of service tax.

Issue-wise Detailed Analysis:

1. Validity of Circular No.158/9/2012-ST and Circular No.154/5/2012-ST:

The petitioner, an association of Chartered Accountants, challenged the validity of the aforementioned circulars, arguing that they are ultra vires the Constitution of India and the Finance Act, 1994. The circulars were issued by the Tax Research Unit of the CBEC and provided guidance on the applicable rate of service tax in cases where services were rendered, and invoices were issued before 01.04.2012, but payments were received after this date. The petitioner contended that these circulars cannot override the statutory provisions or rules made under the Finance Act, 1994.

The court noted that Rule 7 of the Point of Taxation Rules, 2011 was substituted by a new rule effective from 01.04.2012. The new Rule 7 did not cover services rendered by chartered accountants, which were previously covered under the old Rule 7. Both circulars erroneously assumed that the old Rule 7 continued to apply even after the introduction of the new Rule 7. The court held that the circulars were issued on an incorrect basis and thus quashed them as being contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011.

2. Determination of the Taxable Event and Applicable Rate of Service Tax:

The court examined the provisions of the Finance Act, 1994, specifically Sections 66, 66A, 67, 68, 93, and 94, which govern the levy, valuation, payment, exemption, and rule-making authority concerning service tax. The crux of the issue was the determination of the taxable event for the purpose of service tax and the applicable rate, especially in light of the Point of Taxation Rules, 2011.

The Supreme Court in Association of Leasing and Financial Service Companies v. UOI & Ors. held that the taxable event is the rendition of the service. However, the Point of Taxation Rules, 2011, specifically Rule 4, provided guidance on determining the point of taxation in case of a change in the effective rate of tax. Rule 4(a)(ii) was particularly relevant, stating that if the service was provided and the invoice issued before the change in the effective rate of tax, but payment was received after the change, the point of taxation would be the date of issuance of the invoice.

The court noted that in the present case, all services were rendered and invoices issued before 01.04.2012, but payments were received after this date. According to Rule 4(a)(ii), the point of taxation would be the date of issuance of the invoice, thus the applicable rate of service tax would be 10%, not the enhanced rate of 12%.

Conclusion:

The court quashed the circulars as they were contrary to the statutory provisions and the Point of Taxation Rules, 2011. It affirmed that the rate of service tax applicable in the case where services were rendered and invoices issued before 01.04.2012, but payments received after this date, would be 10% as per Rule 4(a)(ii). The court reiterated that circulars cannot override the statutory provisions and rules, and any such circulars have no existence in law. The writ petitions were allowed, and the circulars were quashed, rendering prayer (b) in the writ petition infructuous.