CHARGE OF SERVICE TAX – JUDICIAL INTERPRETATIONS

[Dr. Sanjiv Agarwal]

Legislative History

Prior to 1.7.2012, Section 66 was the charging provision which stated that there shall be levied a tax at the rate of twelve per cent (five per cent up to 13-5-2003; eight per cent from 14-5-2003 to 9-9-2004; ten per cent from 10-9-2004 upto 17-4-2006) of the value of the taxable services as referred to in Section 65(105). The rate of service tax was enhanced from 10 per cent to 12 per cent by the Finance Act, 2006 w.e.f. 18.4.2006. The effective rate of Service Tax was reduced to 10 per cent by Notification No. 8/2009-ST dated 24-2-2009. Thus it was 10.30 per cent w.e.f. 24-2-2009 inclusive of cess w.e.f. 1-4-2012, rate of service tax has been increased from 10 per cent to 12 per cent. Vide Notification No. 2/2012-ST, dated 17-3-2012. A 2 per cent education cess and 1 per cent secondary and higher education cess thereupon is also levied.

Finance Act, 2012 had inserted a proviso to section 66 to the effect that section 66 shall not apply with effect from 1-7-2012. Thus, provisions of this section 66 which was the charging section prior to Finance Act, 2012 shall not be in force after new section 66B inserted by Finance Act, 2012 comes into force i.e., w.e.f. 1-7-2012.

Charge of Service Tax (Section 66B)

Following provision on charge of Service Tax has been inserted by Finance Act, 2012 (w.e.f.

1-7-2012).

"66B. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed."

Explanation. - For the removal of doubts, it is hereby clarified that the references to the provisions of section 66 in Chapter V of the Finance Act, 1994 (32 of 1994) or any other Act, for the purpose of levy and collection of service tax, shall be construed as references to the provisions of section 66B.

Section 66B seeks to levy Service Tax at the rate of twelve percent, on the value of taxable services, other than services specified in the negative list, provided or agreed to be provided in the taxable territory by a person to another. Thus, for a charge of Service Tax, following essential ingredients must be present -

(a)    There should be a service involved.

(b)    Such service should not be one included in the negative list as defined in section 66D.

(c)    Services should be provided or agreed to be provided.

(d)    Services should be provided in the taxable territory only.

(e)    Services should be provided by one person to another person.

(f)     Tax shall be levied on value of services so provided or agreed to be provided.

(g)    Collection shall be in prescribed manner.

Earlier, it was only in respect of services provided or to be provided. In the new provision, if it is agreed to provide service, it will also be covered for the purpose of Service Tax.

Judicial Pronouncements

The following judicial pronouncements are relevant in the context of charge of Service Tax -

• In Thermal Contractors Ltd. v. Director, Rajya Vidyut Utpadan Nigam Ltd. (2006) 3 STT 329 (Allahabad), it was held that the payer of service tax is entitled to realize service tax from its customers, yet it all depends upon the contracts entered into between parties. It is always open to the service provider to charge or not to charge the amount of service tax from its customers and to pay it from its own pocket.

• In  All India Federation of Tax Practitioners v. UOI 2007 (8) TMI 1 - Supreme Court, it was  held that service tax is destination based consumption tax ,which derives its name from the fact that tax burden in ultimately borne by the final consumer and the business does not bear the burden of tax. Provisions of Section 67A seek to achieve this objective by providing that rate and value of taxable service would be the date of rendering service. The service provider and service receiver both know about the tax payable on the said transaction. Hence, this section now specifically provides that the rate of service tax and the value shall be the date on which the taxable services have been provided.

• In Amba Polytubes (P.) Ltd. v. CCE, Jaipur 2007 (6) TMI 488 - CESTAT NEW DELHI,when assessee received commission there was no service tax levy on such services provided by assessee, as service was rendered before imposition of levy. Amount of tax was confirmed only on ground that commission was received when exemption from payment of service tax was withdrawn. It was held that since there was a finding in impugned order that period of service is not known, is contrary to facts on record and hence, demand was not sustainable.

•  In Tempest Advertising (P.) Ltd v. CCE & Customs 2006 (9) TMI 31 - CESTAT,BANGALORE,wherein revenue proceeded to levy service tax on assessee on basis of gross receipts shown in profit and loss account and details shown in income-tax returns, while taxable amounts shown in profit and loss account had not been fully realised by assessee, it was held that returns filed under income-tax are different from returns that have to be filed in terms of service tax. In case of service tax, tax is required to be calculated on total receipts and not on amount still due from customers. Therefore, amounts due from customers were not to be included in taxable value for levy and demand of Service tax in the impugned order was not just and proper.

• In Reliance Industries Ltd. v. CCE, Rajkot 2008 (1) TMI 86 - CESTAT, AHMEDABAD,it was held that rate of tax applicable to service tax shall be rate prevailing on date of rendering services and linking of rate of duty to one prevailing on date of billing or date of payment is not legally justified.

• In Retailers Association of India v. Union of India 2011 (8) TMI 58 - BOMBAY HIGH COURT, it was held that the charging provision u/s 66 imposes tax on taxable services. The charging section refers to diverse sub clauses of clause (105) of section 65. The charge of tax is on taxable services.

• In Home solutions Retails (India) Ltd v. Union of India 2011 (9) TMI 46 - DELHI HIGH COURT , it was held that the provision namely section 65(105)(zzzz) and section 66 of Finance Act,1994 and as amended by Finance Act, 2010, are intra vires the constitution of India. A person who rents an immoveable property or renders any other service in relation to letting of such property for use in course of or furtherance of business or premises creates value addition and is liable to Service Tax.

• In CST, New Delhi v. Hospitality Consultant India Pvt. Ltd. 2010 (10) TMI 415 - CESTAT, NEW DELHI , it was held that rate of tax would be applicable as on the date of raising of bills when services were provided and not on realization of payments.

• In CCE, Rajkot v. Kandla Dock Labour Board 2011 (6) TMI 82 - CESTAT, AHMEDABAD, it was held that in terms of provision rule 6 of Service Tax Rule, 2004, service tax is to be computed at the rate of service tax prevailing on the date and time of payment. If payment is made at prevailing rate instead of enhanced rate it would result in short payment.

• In Nimbua Greenfield Punjab Ltd. v. CCE, Chandigarh 2013 (9) TMI 208 - CESTAT, NEW DELHI, it was held that organizational setup of a concern does not decide the taxability. Incidence of levy is decisive. Service tax is either performance based or property based. Service is a noun or verb 'to serve'. It is an act of helpful activity - help, aid or to do something and while doing so, it may also involve supplying of utilities or commodities.

• In Bharat Sanchar Nigam Ltd. v. CCE, Jammu 2012 (12) TMI 357 - CESTAT NEW DELHI, it was held that liability to pay service tax arises with reference to place where service is provided rather than place where consideration is collected.

• In BMD Pvt Ltd v. CCE, Jaipur-II 2012 (8) TMI 718 - CESTAT, NEW DELHI, it was held that service tax is not to be paid for entering into contract as levy arises only when activities are performed.

• In CST, Delhi, v Consulting Engineering Services (I) Pvt. Ltd. 2012 (7) TMI 410 - CESTAT, NEW DELHI, it was held that rate of service tax in force at the time of rendering of services is applicable and not the one on the date of billing or on receipt of payment. [Also see Art Leasing Ltd v CCE 2007 (6) TMI 217 - CESTAT, BANGALORE; CCE, Noida v Matsushita TV and Audio Indore Ltd 2005 (7) TMI 610 - CESTAT NEW DELHI, Lumax Samlip Industries v CST, Chennai 2006 (12) TMI 448 - CESTAT CHENNAI; Reliance Industries Ltd. v CCE, Rajkot 2008 (1) TMI 86 - CESTAT, AHMEDABAD].

• In Delhi Chartered Accountants Society (Regd.) v. Union of India 2013 (2) TMI 55 - DELHI HIGH COURT High Court has held that Circular Nos. 154/5/2012-ST dated 28.3.2012 and 158/9/2012-ST dated 8.5.2012 issued by CBEC are contrary to law and rules and hence quashed. It was held that on account of deletion of reference to Chartered Accountant's Service in Rule 7(C) of POT Rules w.e.f. 1.4.2012, CA services ceased to be covered by Rule 7. Accordingly Rule 7 was inapplicable to services provided and invoices raised before 1.4.2012 even if the payment was received on or after 1.4.2012. Such contingency was covered by Rule 4 (a)(ii) and the point of taxation would be date of raising of invoice. Thus, rate of Service Tax applicable was 10 per cent and the position is that the new Rule 7 w.e.f. 1.4.2012 does not provide for the determination of point of taxation in respect of services rendered by chartered accountants.

• In Kerala State Insurance Department v. Union of India 2013 (4) TMI 270 - KERALA HIGH COURT, it was held that activities of Kerala State Insurance Department (KSID) in providing life insurance cover to employers of State Government as a part of its statutory obligation giving effect to statutory provisions will not amount to provision of taxable service so as to attract Service Tax. The insurance of assets owned by the Government was also not liable to Service Tax being self service. Service Tax can not to be avoided unless exemption is obtained. It was further held that in the case of an institution including a Government Company, it is a separate entity of its own, in the legal parlance and the Company / Government Company is eligible to sue or be sued independently. If the assets of such institutions are sought to be covered by issuing a Policy, it can only be by way of a 'Contract' and not by virtue of any statutory obligation. On issuance of any such policy by way of contract, it may turn to be a business and of course, a 'taxable service' under section 65(105)( d) of the Finance Act. If this be the position, it may attract the tax liability as well. If the State wants to have exemption from the tax in respect of such transactions as well, it can only be by way of filing necessary application for getting exemption, as provided under section 93 of the Finance Act, 1994.

• In Tata Sky Ltd v. State of Tamil Nadu 2013 (6) TMI 586 - MADRAS HIGH COURT , it was held that for charging section to be valid, it must specify the character of the imposition known by its nature which prescribes the taxable event attracting the levy, a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the rate at which the tax is imposed, and the measure or value to which the rate will be applied for computing the tax liability. If those components are not clear and definitely ascertainable, it is difficult to be said that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy is fatal to its validity. Hence, as charging section under Tamil Nadu Entertainment Tax Act merely specified rate of tax and measure of tax and failed to specify taxable event and person on whom levy was imposed, charge of entertainment tax on DTH service was held invalid.

• In Tata Sky Ltd. v State of MP; 2013 (4) TMI 373 - SUPREME COURT, it was held that notification cannot enlarge the charging section. If no tax can be levied on an activity under the charging section, no tax can be levied on such activity even after issuance of notification prescribing rate of tax thereon. It is well settled that if collection machinery provided under Act is such that it cannot be applied to an event, it would follow that event is beyond charge created by taxing statute. Valuation provision provides only a measure of tax and it does not create charge. The question of going to measure of tax would arise only if it is found that charge of tax is attracted.

• In LSE Securities Ltd v. GGE, Ludhiana 2012 (6) TMI 364 - CESTAT, New Delhi , where assessee, stock broker incurred turnover charges, stamp duty, BSE charges, SEBI fees and demat charges, it was held that these charges could not be included in assessable value to be taxed on the ground that they were received by stock broker as they were not commission or brokerage but were recoveries from investors to make payment to respective authorities in accordance with statutory provisions of Indian Stamp Act, 1899 and SEBI guidelines. It was further held that power of taxation cannot be implied. Source of power not specifically speaking of taxation cannot be interpreted to expand its width to include power to tax by implication or by necessary inference. Before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. It was further held that power of taxation cannot be implied. It, if not specifically speaking of taxation cannot be interpreted to expand its width to include power to tax by implications or by necessary inference. For charge of tax, before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section.

• In Vistar Construction Pvt. Ltd. v. Union of India 2013 (2) TMI 52 - DELHI HIGH COURT,in relation to applicable rate under works contracts composition scheme, it was held that taxable event under Service Tax is rendition of service and rate of Service Tax in force on the date of providing service is applicable for payment of Service Tax and not the rate in force on the date on which payment is received. In case of works contract services provided before 1.3.2008, composite rate of 2 per cent was applicable even if payments were received on or after 1.3.2008 when composition rate was increased from 2 per cent to 4 per cent (applicable to law prior to Point of Taxation Rules, 2011).

• In CCE v. Standard Niwar Mill 2013 (8) TMI 269 - ALLAHABAD HIGH COURT , it was held that in relation to charge of service tax, there were three stages in imposition of tax being, declaration of liability, assessment and recovery and third stage i.e. recovery of tax would come into play only when a person does not voluntarily pay tax.

•  In A.L.R.K Interiors Pvt. Ltd v. CST, Chennai 2013 (12) TMI 75 - CESTAT CHENNAI ,since rate of service tax was lower that when service was provided by the assessee and was higher when payment was received by him, it was held that the date of entry was to be considered as the relevant date for payment of service tax and not the date of billing.

• In Union of India v. Steel Authority of India Ltd. 2013 (5) TMI 460 - CHATTISGARH HIGH COURT,it was held that tax imposed upon commodities, goods, financial transactions in contradistinction upon individuals was generally referred to as 'duty', whereas, tax was levied also on tax payers, who could be individuals or legal entities. Hence, duty and tax have same connotation, same purpose, though duty is sub-specie of tax.