CA. Pradeep Jain, CA. Preeti Parihar, Manish Vyas


Around a year back, the budget of previous year proposed the “service tax by way of negative list” which was implemented w.e.f. 1.7.2012. This is the milestone date which transformed the service tax law by implementing a numerous key changes. One such key change was the “partial reverse charge” which was totally new concept in India. As a tradition, every new law has several consequences which show their colour in later period. This piece of diction is about one such area namely “partial reverse charge on security services and director’s services” and its implication on the services given by certain professional bodies.

What is partial reverse charge?

The concept of reverse charge was also prevailing in the positive list era where certain cases/services were specified where the service recipient was made liable to pay the service tax instead of service provider. However concept of partial reverse charge was introduced w.e.f. 1.7.2012 wherein certain cases were prescribed where both service recipient and service provider were made liable to pay the service tax on the basis of specified percentage. This was done by issuance of Notification No. 30/2012- ST dated 20-06-2012 which covered the 10 services on which reverse charge was applicable. Out of 10 services, 3 services namely supply of man power, renting of motor vehicle and works contract, were specified on which partial reverse charge was applicable. This notification was implemented alongwith implementation of “service tax by way of negative list”.

Additions in the list of partial reverse charge:-

Certain additions were made to reverse charge Notification No. 30/2012- ST dated 20-06-2012 vide Notification No. 45/2012- ST dated 07-08-2012. These two notifications added two more services “Security Service”   and “Service provided by Directors of company to said company” in reverse charge mechanism. Partial reverse charge as already applicable to the man power supply is specifically extended to security services with same provisions. Thus, now where the security services are provided by any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons to a business entity registered as body corporate; the 75% service tax is payable by the service recipient and 25% service tax is payable by service provider. On the other hand, full reverse charge is extended to services provided by the director of the company where the 100% service tax on the services of the director will be paid by the company.

Definition of “Security Service”:-

Notification No. 45/2012- ST  has added the security services and services provided by directors to the list of reverse charge mechanism. In this context, the Service Tax Rules, 1994 have also been amended vide Notification no. 46/2012-ST dated 7.8.2012 for adding the definition of security services. This notification has inserted a new clause (fa) in the rule 2(1) of the Service Tax Rules, 1994 which defines the term “security services” as follows:-

“(fa) “security services” means services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity”

The above definition is very wide and it covers:-

  • The services related to security of any property;
  • The property may be movable or immovable;
  • The security services may be provided in any manner;
  • It will include the services of INVESTIGATION, DETECTION or VERIFICATION of any FACT or ACTIVITY.

If any service satisfies the above referred criteria, it will fall under the definition of “security services” and reverse charge mechanism will be applicable if these services are provided by an individual, HUF, partnership firm or AOP to any business entity registered as body corporate.

Investigation, Detection and Verifications – three key words of new definition:-

The definition of “Security services” includes “services of investigation, detection or verification, of any fact or activity” and this inclusive part of the definition has enormously widened the scope of security service. The Dictionary meaning of words ‘Investigation’, ‘Detection’ and ‘verification’ are as follows:-

  • Investigation: Process of inquiring into or tracking down through inquiry. (Black’s Law Dictionary)
  • Detection: Discovery or laying open of that which was hidden, i.e. even out the secret (Black’s Law Dictionary)
  • Verification: Confirmation of correctness, truth or authenticity, by affidavit, oath or deposition (Black’s Law Dictionary)

The collective reading of the above definition with the inclusive portion of the definition of security services makes it clear that any services provided in relation to confirmation of correctness/truth/authenticity of any fact or activity will come under purview of security services. This part of the above definition has vital implications on the services provided by the practicing Chartered Accountants.

New definition v/s Services provided by Chartered Accountants:-

Amongst a variety of services as provided by the Practicing Chartered Accountants, the following services are very commonly carried out:-

  • Investigation Services:-

Chartered Accountants are often called upon to carry out investigation to ascertain the financial position of business in connection with matters such as a new issue of share capital, the purchase or sale or financing of a business, reconstruction and amalgamations. These services are coverable under the definition of ‘Security Service’ as Chartered Accountant provides service of “investigating the facts of financial position or investigating the activity of operating performance”.

  • Stock Audit and Assets Verification:-

Practicing Chartered Accountants also conduct verification of asset and stock audit of borrower firm for banks or loan lender. This activity involved verification of asset or stock either physically or otherwise and also involved inspection work. Therefore it is covered under above discussed definition of security service.

  • Statutory Audits and Other Internal Audits:-

The statutory audit carried out by the auditors also involves the verification, inspection and detection of fact represented by financial statements. Further the object of audit is also to secure the interest of stakeholders. Thus, these services will also be covered under the definition of the security services.

The above referred are few very common services out of a range of services provided by the professional Chartered Accountants. In fact a no. of other services are provided in sequence for carrying out their statutory duties.

Services provided by Chartered Accountants: a case of bundled services:-

As per SA- 200 issued by the Institute of Chartered Accountants of India (ICAI) :-

“Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.”

As per above definition, audit is examination of financial information of any entity and such examination is conducted for expressing an opinion thereon. Thus, a chain of activities are involved like examination of books of accounts, financial statements, stock verification, etc. It is only after every such activity is carried out, then the opinion is given in form of the audit report. Thus, it is a case of bundled services. As per section 66F (3):-

“(a) If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character”

The above provision says that in case of series of services provided, the service dominating the contract will be considered. In case of audit, though the services are being taken for expressing an opinion on the financial statements; yet the dominant service amongst all the services is the “verification” only. Where or not anyone else agree to this, the department will surely do; and partial reverse charge will be made applicable if the other conditions specified in Notification No. 30/2012- ST dated 20-06-2012 as amended are satisfied.

Reverse charge on the directors:-

Notification No. 45/2012- ST, full reverse charge has been extended to the ‘services provided or agreed to be provided  by a director of a company to the said company’. Thus, in such a case, 100% liability service tax is to be paid by the company for the services provided to it by the director.

However, clause 44 of section 65B defines the term ‘service’ and as per exclusion clause (b) of this definition, the following is not a service:-

“(b) a provision of service by an employee to the employer in the course of or in relation to his employment”

Thus, the activities carried out by a director who is the employee of the company are not covered under the definition of service. Accordingly, no reverse charge is applicable. However, the services provided by the directors who are not the employees of the company, will come in the ambit of reverse charge w.e.f. 7.8.2012. It means service tax would be applicable on Services provided by Independent/Non-Executive Directors of the Company because Managing Director/Executive Director/Whole time Director is the employee of company. But if any amount paid to Managing Director/Executive Director/Whole time Director which is not “a provision of service by an employee to the employer in the course of or in relation to his employment”, will be taxable e.g. renting of building by director to company.

Implications on services provided by a Director who is a Chartered Accountant:-

Many Practicing Chartered Accountants are also directors of companies and work in their professional capacity or as an independent director. In such case reverse charge will apply and 100% liability to pay service tax will be on company for their services provided to the company. Also, as per Section 226(3)(b) of the Companies Act, 1956; any officer or employee of the company cannot be a statutory auditor; therefore both the above clauses (being provision of auditing services includible in the definition of security services and services provided by a director) will not conflict in any case.  Thus, both of these two clauses will have different play.

Good bye words:-

The partial reverse charge is under transitional phase. At the time of implementation of partial reverse charge, TRU has issued the education guide dated 20.6.2012 which clarified the concept to much extent. However, the partial reverse charge on security services was included thereafter w.e.f. 7.8.2012 and also no further clarification was issued in this context to clarify the scope of these services. However, the clarification was issued in context of director’s services after their implementation, thus, this issue is much clear than that of security services. The analysis of the legal provisions pertaining to the security services w.e.f. 7.8.2012 indicates that this provision has far away impacts, most of which have not yet come into play. Hopes were there from Budget, 2013; but it has also gone without touching this sphere. It seems that the issue will burst out suddenly giving rise to the litigations. Let’s see, whether the clarification is issued first or the litigation arises first… Issue left open!!!

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  1. ZAINAB KAKA says:

    will a Chartered Accountant charge service tax on providing advisory services to a advisory board of a company of which he is a member? or he will only collect the advisory fees and the service tax will be charged under reverse mechanism and paid by the company of which he is the member of the advisory board?

  2. Pratik says:

    I need advice in regard to payment to EXECUTIVE director (he is also CA):
    1. Salary
    2. Sitting Fees
    3. Consultancy Fees

    In 1 st case Sec. 192 is applicable and due to being employee, reverse charge is not applicable.

    In above case reverse charge is applicable on 2 or 3rd?

  3. MoizW says:

    I completely disagree with the author that services provided by CA will fall under Security Service as it a well settled principle that if a service falls within category of two or more defined services then the more specific definition shall prevail over the general one. Thus, where CA service is separate service by itself then there will be no question of it being included in Security Service.

  4. AMAR MALLIK says:

    Dear Sir,

    I need one suggestion regarding the consultation fees

    We are paying one person as consultancy fees(Not Legal consultancy).The service provider does not charge any service Tax.

    Are we liable to pay service tax on the receipt of that service? Is it covered under Reverse charge Mechanism?

    Please suggest.

    Amar Kumar Mallik

  5. ARPIT RAWAT says:

    Saswata Chakravartty

    Sir in opinion commission paid to WTD would not fall in the definition of service since WTD is called the employee of the co. & watever paid to him fall in the definition of Remuneration hence Employee-employer relation ship exist so no question of R.C becz not levy of S.t

  6. Lalbabu Sah says:

    The interpretation of Security Services can be made on reasonable basis. Literal interpretation may not be useful in this regards. Security services and CA services cannot be co-related and read. If the intention of law maker was to include the CA services in Partial reverse charge mechanism, then they may clearly include it as “CA services” not as Security Services’.
    The words of inclusion like investigation, detection; verification etc doesn’t mean CA services are covered under this reverse charge mechanism.

    Lalbabu Sah
    CA final Student

  7. Santosh Kumar Debata, TRP says:

    Secutiry Service is different from Professional Service. More such services are related to safe & security like Advocate’s Service to secure a person, Pest control Service to protect materials from insects etc. so Service of C.A. Can Not be included in Security Service.

  8. GAUTAM JOSHI says:

    I am also surprised to see such an unnecessary stretch of Imagination.

    I completely agree with AP Agrawal and don’t agree with linking of CA services with security services. The law has to be interpreted according to purpose associated with it instead of dreaming and ending to a conclusion for which it is not made at all. Every one can make a difference between security agency services and CA services. Though both provides “the services of investigation, detection or verification, of any fact or activity” but one has to respect that CAs follows set of regulated procedures, provides an independent professional opinion and undersigns the reports. Please note that certification is not done by security agency services and in fact they have no legal backing to sign a report and certify that the books of accounts or piece of paper is examined and risk free (in other words secure).

    At last, please respect that not everything can be explained by words.

  9. K K SARAOGI says:

    In reverse charge mechanism before July 2012 and now service receiver has to make payment of tax. However, earlier input credit was taken by the service receiver but now it is the service provider who has to take credit. The present system is not justified as the service tax liability is finally borne by the service receiver who should be allowed to take input credit.

    If anybody’s view is in the negative, I would appreciate to be favored by a reply.

  10. Saswata Chakravartty says:

    Dear Sir ,
    The Reverse Charge Mechanism is very well explained. the only ambiguity that I find , which is my query as well is that Whether commission on Turnover paid to Whole Time Directors fall under Reverse Charge Mechanism ?

  11. R.K.SOHANE says:

    kindly give the detail circular on service tax and vat on multistory much rate will be applicable,and what cost of land(at the time of purchasing cost or at the time of building sell out) shouid be taken for calculation.

  12. AP Agrawal says:

    Unfortunately the interpretation is more like a body without soul. It seems to be textual instead of being contextual. Going by the logic a scientist researching in lab to find a fact or the activity like the God Particle is subject to partial reverse charge. Further, going by the same logic, it may be argued all auditors provide security service even without the words of inclusion as they guard the property of the shareholders against acts of management and outsiders.

    It seems that law is not that fanciful. The words of inclusion like investigation, detection, verification etc. will take their color from “security” and not de hors it.

    We may read the words in a manner they make sense as against a manner which makes nonsense of it.

    AP Agrawal
    JS&LA Min. of Law (Retd.)

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September 2021