No Service Tax on Income from profession of advocacy: Karnataka HC

S Muniramaiah Vs Assistant Commissioner of Central Tax (Karnataka High Court)

In the case of S Muniramaiah Vs Assistant Commissioner of Central Tax, the Karnataka High Court ruled that income earned from the profession of advocacy cannot be subjected to service tax.

Background: The petitioner, S Muniramaiah, an advocate by profession, challenged the validity of a demand for service tax issued by the Assistant Commissioner of Central Tax. The demand was based on the claim that the petitioner’s services fell under the category of taxable services as per the Finance Act, 1994.

Arguments:

1. Petitioner’s Argument:
   • The petitioner argued that his income from the profession of advocacy should not be subjected to service tax. He relied on a previous court decision (W.P.No. 26096/2022) which held that legal professionals’ income from advocacy is not subject to service tax.
   • The petitioner also contended that the Assistant Commissioner’s order was issued without proper jurisdiction and without following the principles of natural justice, including failing to provide an opportunity for a hearing.
2. Respondent’s Argument:
   • The respondents, represented by Sri. Aravind V. Chavan, argued that while the legal position regarding non-taxability of income from the legal profession is settled, there were concerns about certain agricultural receipts included in the petitioner’s income and expenditure accounts. They suggested that these receipts needed to be scrutinized by the adjudicating authority.

Court’s Analysis:

• The court referred to its earlier judgment in W.P.No. 26096/2022, which clarified that individual advocates or firms of advocates providing legal services are not liable to pay service tax. Instead, the liability to pay service tax lies with the recipients of the service, as per the Service Tax Rules and relevant notifications (Notification No. 25/2012-ST and Notification No. 30/2012-ST).
• The court emphasized that legal services provided by individual advocates or firms are exempt from service tax unless they fall outside the specific exemptions mentioned in the notifications.
• In cases where services are provided by senior advocates, the obligation to pay service tax falls on the business entity receiving the service, not on the senior advocate.

Judgment:

• The court set aside the impugned order by the Assistant Commissioner of Central Tax, noting that the order failed to comply with the principles of natural justice.
• The matter was remitted back to the adjudicating authority to reconsider the case after issuing a proper show-cause notice and allowing the petitioner to submit a fresh reply regarding receipts other than from the practice of advocacy.
• The court upheld that income from the legal profession is exempt from service tax, in line with the observations made in the previous case (W.P.No. 26096/2022).

Conclusion: The petition was disposed of, with the court reiterating that income from the profession of advocacy cannot be subjected to service tax, and directing the adjudicating authority to reassess the matter in accordance with the law and principles of natural justice.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

Petitioner has called in question the validity of the order in original at Annexure-A whereby the Authority concerned, has raised a demand regarding taxable services other than those services specified in the negative list in the Finance Act, 1994.

2. It is the case of the petitioner that he is an advocate by profession and in terms of the order passed by this Court in W.P.No. 26096/2022 income from profession of advocacy cannot be the subject matter of demand of service tax and accordingly, the order in original is required to be set aside.

3. Sri. Aravind V. Chavan, learned counsel appearing for the respondents submits that though the legal question relating to non-taxability of income from legal profession under the Finance Act is concerned, the position as on date appears to be settled in terms of the order passed in W.P.No. 26096/2022, but however, in the present case, the income and expenditure accounts for the relevant years would indicate certain agricultural receipts and as regards such receipts, the matter requires to be considered by the adjudicating authority.

4. The observations made at Paragraph Nos. 5 to 10 in W.P.No.26096/2022 are as follows:

“5. Insofar as legal services rendered by individual advocates or firm of advocates, the person liable to pay service tax in terms of the Service Tax Rules, 1994 [for short ‘Service Tax Rules’] namely Rule 2 (1) (d) (D) (II) is the individual advocate or firm of advocates who offer legal services.

6. In terms of Notification No. 25/2012-ST dated 20.06.2012 passed in exercise of power under Section 93 (1) of the Finance Act, 1994 the Central Government has exempted certain taxable services from the whole of the service tax leviable under Section 66B of the Finance Act, 1994. Amongst the services exempt, it includes services of legal professionals consisting of Partnership Firm of Advocates or an individual Advocate other than a Senior Advocate.

Clause 6(b) of the Exemption Notification¹ provides as follows:

“(b) a partnership firm of Advocates or an individual as an advocate other than a senior advocate, by way of legal services to –

(I) an advocate or partnership firm of advocates providing legal services;

(II) any person other than a business entity; or

(iii) a business entity with a turn over up to rupees ten lakhs in the preceding Financial Year;”

7. Even where individual advocates or partnership firm of advocates who fall outside the exemption under the Notification 25/2012-ST, the person liable to pay service tax is the recipient of the service.

8. In terms of Notification No.30/2012-ST dated 20.06.2012, liability is imposed as follows:

” … The Central Government hereby notifies the following taxable services and the extent of service tax payable thereon by the person liable to pay service tax for the purposes of the sub­section, namely: –

I. xxx

II. The extent of service tax payable thereon by the person who provides the service and any other person liable for paying service tax for the taxable services specified in paragraph I shall be specified in the following table, namely:-

9. In the case of Senior Advocates it is to be noted that Rule 2 of the Service Tax Rules, Clause (d) provides for “person liable for paying service tax” and lists out at Clause (DD) as follows:

“(DD) in relation to service provided or agreed to be provided by a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, and the senior advocate is providing such services, the recipient of such services, which is the business entity who is litigant, applicant, or petitioner, as the case may be.”

Accordingly, it is clear that where Senior Counsel are engaged, the obligation to pay service tax is on the recipient of such services. If that were to be so, there is no obligation on the Senior Counsel to pay service tax.

10. In light of the above, individual lawyers and Partnership of firm of Advocates, Senior Advocates are exempted from payment of service tax under certain circumstances.”

5. Taking note of the legal position as would emanate from the order passed in W.P.No.26096/2022 wherein this Court has recorded a finding that the income of a legal professional cannot be the subject matter of service tax on the ground that it is the recipient who pays and taking note of the observations made in Paragraph Nos. 5 to 10 as extracted above, impugned order is liable to be set aside.

6. Accordingly, the order at Annexure-A is set aside and the matter is relegated to the stage of hearing after show cause notice. Petitioner is at liberty to make out a fresh reply, if found necessary as regards the receipts other than from the practice of advocacy. Insofar as the income from legal profession is concerned, in light of the observations made in W.P.No.26096/2022 the same is liable to be excluded.

7. In light of the above, the petition is disposed off. All contentions are kept open.