krishi kalyan cess on pending payments

[Suriyanarayanan Iyer]

1)  This article seeks to examine the constitutional validity of rule 5 of the Point of Taxation Rules as amended, being applied to Krishi kalyan Cess introduced from 01.06.2016.

2) Relevant statutory provisions in Finance Act, 1994 are reproduced below.

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SECTION [66B. Charge of service tax on and after Finance Act, 2012. -There shall be levied a tax (hereinafter referred to as the service tax) at the rate of [fourteen 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.]

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SECTION [67. Valuation of taxable services for charging service tax. - (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, -

(i)    in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

(ii)   in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;

(iii)  in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.

(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.

(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.

Explanation. - For the purposes of this section, -

(a)   [“consideration” includes -

(i)    any amount that is payable for the taxable services provided or to be provided;

(ii)   any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;

(iii)  any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.’.]

[(b)   *  *  *  *]

(c)   “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and [book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.]]

SECTION [67A. Date of determination of rate of tax, value of taxable service and rate of exchange. - The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

[Explanation. - For the purposes of this section, “rate of exchange” means the rate of exchange determined in accordance with such rules as may be prescribed].

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3) Section 67A reproduced above as it existed before Finance Act, 2016 provided for levy of tax as applicable at the time of rendering the service. This provision was in complete alignment with rule 4 of the Point of Taxation Rules dealing with change in rates of tax.

4) Section 67A was amended and a sub-section (2) was inserted in 2016. The amended section 67A is as below.

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SECTION [67A. Date of determination of rate of tax, value of taxable service and rate of exchange. - (1) The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

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“(2) The time or the point in time with respect to the rate of service tax shall be such as may be prescribed.

[Explanation. - For the purposes of this section, “rate of exchange” means the rate of exchange determined in accordance with such rules as may be prescribed.

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5)  Rule 5 of Point of Taxation Rules which is interpreted to mean that all pending payments to service providers as on 01.06.2016 will suffer Krishi Kalyan Cess introduced in Finance Act, 2016 effective from 01.06.2016 read as below before its amendment in 2016.

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RULE [5. Payment of tax in case of new services. - Where a service is taxed for the first time, then, -

(a) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable;

(b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time.]

6) The following explanations were added to rule 5 of the Point of Taxation Rules in 2016.

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[Explanation 1. - This rule shall apply mutatis mutandis in case of new levy on services.

Explanation 2. - New levy or tax shall be payable on all the cases other than specified above.]

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7) Because of the above explanations, it is being stated that on all outstandings where both invoice and payments are pending or payments made but invoices not issued within 14. 06.2016 will suffer Krishi kalyan Cess, though services might have been rendered before 01.06.2016.

8) The aforesaid interpretation is examined below.

8.1) It is settled law that rate of service tax cannot change based on date of payment. Please see COMMR. OF SERVICE TAX Versus CONSULTING ENGINEERING SERVICES (I) P. LTD- 2013 (30) S.T.R. 586 (Del.). = 2013 (1) TMI 434 - DELHI HIGH COURT

8.2) Further, by applying amended rule 5 of the Point of Taxation Rules to new levies, Government is levying tax through subordinate legislation. Sub-section (1) of section 67A specifically states that rate of tax as on the point of time of rendering the service will apply.

Sub-section (2) of section 67A inserted in 2016 says Government can prescribe the time or the point in time with respect to the rate of service tax.

In exercise of its powers under aforementioned sub-section (2), Government has inserted the two explanations in rule 5 of the Point of Taxation Rules. But the moot question is whether Government can exercise its powers in such a manner that rules framed / amended under notifications issued by taking recourse to sub-section (2) of section 67A are not in conformity with sub-section (1) of section 67A?.

The answer has to be ‘no’. The words ‘in force or as applicable at the time when the taxable service has been provided or agreed to be provided’ occurring in sub-section (1) of section 67A cannot be nullified by Government through subordinate legislation of Point of Taxation Rules enacted/ amended by taking recourse to sub-section (2) of section 67A. In case of taxation of services, taxable event is rendering of services and cannot be the date of invoice or payment, though these events also play a part in assessment and collection of service tax. By making date of invoice or date of payment as time for levy of a new adjunct like Krishi kalyan Cess through Point of Taxation Rules, Government is levying tax on services rendered and completed long before the date of introduction of Krishi kalyan Cess. Executive cannot assume such taxing powers through subordinate legislation. In ADANI POWER LIMITED Versus UNION OF INDIA-2015 (330) E.L.T. 883 (Guj.) = 2015 (11) TMI 1466 - GUJARAT HIGH COURT (upheld by Supreme Court in Union of India v. Adani Power Limited - 2016 (331) E.L.T. A129 (S.C.)] = 2016 (2) TMI 850 - SUPREME COURT the Court held as below.

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33. The effect under Section 26 cannot exceed the charging provision. Section 25 contains a power to issue subordinate legislation which must be within the power to levy and cannot exceed the power to levy. If the power to levy duty under Section 12 of the Customs Act is extended to provide for levy on goods removed from SEZ into DTA, it shall render Section 12 beyond legislative competence since Entry 83 of List I of Schedule VII of the Constitution of India and the powers the Parliament only to provide for levy of customs duty on goods imported from a country or territory outside India, into India. It is also equally settled law that liability and exemption are two different aspects as held by the Apex Court in Associated Cement Company v. State of Bihar and Others, 2004 (7) SCC 642. = 2004 (9) TMI 380 - SUPREME COURT OF INDIA The question of exemption arises only after the liability is fixed. If there is no liability, the question of exemption does not arise at all. There is no liability of developers and units situated within SEZ under the Customs Act for removal of goods from SEZ into DTA or non-processing areas because in neither case, are these “imports” as defined in Section 2(23) of the Act read with definition of “India” as defined in Section 2(27) thereof. As there is no liability under the said Act, the question of exempting partial or conditional, electrical energy removed from SEZ into DTA or non-processing area of SEZ @ 16% ad valorem or any other rate does not arise at all. The impugned notification is a piece of delegated or subordinate legislation and, therefore, cannot travel beyond the provisions of the charging section.(emphasis supplied).

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Conclusion

In view of the aforesaid reasons, the legibility of Krishi kalyan Cess on services rendered and completed long before 01.06.2016 may not be constitutionally valid.