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:-
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:-
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:-
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”.
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.
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!!!