Contrary View to Hon’ble Delhi High Court decision quashing Circular No.154 & 158 with reference to Point of Taxation Rules, 2011.   In a recent judgment dated 01-02-2013, the Hon’ble High Court of Delhi, in the case of Delhi Chartered Accountants Society (Regd.) V/s Union of India & Others, C.M.No.9237/2012 (for stay, has quashed Circular No. 154/5/2012 – ST dated 28-03-2012 and Circular No. 158/9/2012 – ST dated 08-05-2012 as being contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011. 

The relevant extracts of the judgment is as below:-

The question before us is 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.

In the present case there is no dispute that all the services were rendered before 01.04.2012 and even the invoices were raised before that date and it was only that the payment was received after the said date. In such a case, according to the petitioner, Rule 4(a)(ii) of the Point of Taxation Rules, 2011, applies and the point of taxation shall be the date of issuance of the invoice. The service tax authorities however rely on two circulars issued by the Tax Research Unit of the CBEC –Circular No. 154 dated 28.03.2012 and Circular No. 158 dated 08.05.2012 and which say that “  in case of  8 specified services provided by individuals or proprietary firms or partnership firms and in case of services wherein tax is required to be paid on reverse charge by the service receiver, if the payment is received or made, as the case maybe, on or after 1st April 2012, the service tax needs to be paid @12%.

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.

The judgment has been pronounced specifically for services of chartered accountants, but is equally applicable to below mentioned 8 specified services provided by individuals or proprietary firms or partnership firms:

1. Consulting Engineer U/s 65(105)(g)
2. Architect  U/s 65(105)(p)
3. Interior Decorator  U/s 65(105)(q)
4. Practicing Chartered Accountant   U/s 65(105)(s)
5. Practicing Cost Accountant   U/s 65(105)(t)
6. Practicing Company Secretary  U/s 65(105)(u)
7. Scientific or Technical Consultancy U/s 65(105)(za)
8. Legal Services U/s 65(105)(zzzzm)

Adverse Consequences of this judgment for CA’s: In my view, even when the judgment is the victory of the Delhi Chartered Accountants Society over the department, as it says that the point of taxation shall be the date of issuance of invoice and hence tax to paid @ 10% instead of @ 12% as provided in the said circular, it will adversely affect the CA’s and other 7 specified service providers. If the date of invoice is the point of taxation, then the DUE DATE for payment of tax to the exchequer for all invoices issued against service provided on or before 31-03-2012 shall be 31-03-2012 (Proviso to Rule 6(1) of Service Tax Rules, 1994). It seems unintended that when the payment of tax is on receipt basis, due to this judgment, it is on accrual basis up to 31-03-12, for the above situation and subsequently again on receipt basis.

It is also important to mention that this judgment has, in no way, affected the applicability of point of taxation in case of services wherein tax is required to be paid on reverse charges by the service provider, which were covered under old Rule 7 and also under new Rule 7, except per se quashing of the said circulars.

With due respect to the Hon’ble Delhi High Court, I am briefly presenting my views which are contrary to the above judgment.

The moot question here is the determination of date for the purpose of applying the rate of service tax. The rate of service tax has been increased from 10% to 12% with effect from 01-04-2012. So, if the date is determined before 01-04-12, service tax is to be collected @ 10%, otherwise 12%. Now, Section 94(2)(hhh) of the Finance Act, 1994 has given specific power to the Central Government to make rules for providing ‘the date for determination of rate of service tax’. In exercise of those powers; the Central Government has issued Notification No. 18/2011 dated 01-03-2011 which is known as Point of Taxation Rules, 2011.

Here, according to the petitioners (i.e. Delhi Chartered Accountants Society), Rule 4(a)(ii) of the Point of Taxation Rules, 2011, applies and the point of taxation shall be the date of issuance of the invoice. I agree that IF Rule 4(a)(ii) is applicable, then certainly the point of taxation shall be the date of issuance of the invoice. But, in my view, Rule 7, as it stands till 31-03-2012 (i.e. Old Rule 7) shall apply in the given case.

Old Rule 7 provided for determination of the point of taxation in case of specified services or persons. This rule was substituted by a new rule w.e.f. 01.04.2012. The old rule which existed prior to that date was as below:

“7. Determination of point of taxation in case of specified services or persons. – NOTWITHSTANDING anything contained in these rules, the POINT OF TAXATION in respect of,-

(a) the services covered by sub-rule (1) of rule 3 of Export of Services Rules, 2005;

(b) the persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994;

(c) individuals or proprietary firms or partnership firms providing taxable services referred to in sub-clauses (g), (p), (q), (s), (t), (u), (za), (zzzzm) of clause (105) of section 65 of the Finance Act, 1994, shall be the date on which payment is received or made, as the case may be:

Provided that in case of services referred to in clause (a), where payment is not received within the period specified by the Reserve Bank of India, the point of taxation shall be determined, as if this rule does not exist.

Provided further that in case of services referred to in clause (b) where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.

Provided also that in case of ―associated enterprises,  where the person providing the service is located outside India, the point of taxation shall be the date of credit in the books of account of the person receiving the service or date of making the payment whichever is earlier.”

Rule 7 begins with ‘Notwithstanding anything contained in these rules’ means rule 7 has overriding effect over all the other rules (including rule 4).

In simple words, Old Rule 7 says that notwithstanding anything contained in rule 4 or any other rules, in respect of Chartered Accountants providing the taxable service of chartered accountancy, the point of taxation for the purposes of determining the rate of tax and collection thereof shall be the date on which payment is received. In respect of services provided before 31-03-2012, the point of taxation is certainly and finally determined as the date of payment and subsequent amendment to rule 7 or any other rule should not affect its taxability. Even if the invoice is also issued after 31-03-12, the position of law would be the same. The taxable event is the rendering of service and law in force at the time of rendering of service is relevant and not at the time of payment. It is not necessary that on the date of payment, the same rule 7 should be in force.

The judgment has stated that “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”. According to me, the circular is not erroneous as the new Rule 7 has no relevance and does not comes into the picture for service rendered on or before 31-03-12.

Therefore, in my view, in case of 8 specified services, including the services of a chartered accountant, when the service has been provided before 01-04-2012, but payment received afterwards, the point of taxation would stand determined under Rule 7, due to its overriding status, as on the date of rendering of service. It shall be the date of payment and shall not alter due to subsequent changes in the Point of Taxation Rules, 2011 that became effective only from 01-04-2012. The rate of service tax as prevalent on the point of taxation shall be applicable which is currently 12% and due date for payment of tax shall be accordingly determined.

The Author is a Service Tax Consultant

You can E:mail me at tax2001-it@yahoo.com

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