The Finance Bill, 2009 seeks to cover four new services, notable amongst them being ‘Legal Consultancy Service’. In his Budget speech, the Finance Minister explained the scope of the proposed levy in the following manner:
“As the Hon’ble Members are aware, services provided by Chartered Accountants, Cost Accountants and Company Secretaries as well as by engineering and management consultants are presently charged to Service Tax. Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree! As such, I propose to extend Service Tax on advice, consultancy or technical assistance provided in the field of law. This tax would not be applicable in case the service provider or the service receiver is an individual.”
2. Sub-clause ‘(zzzzm) is sought to be inserted in clause 105 of Section 65 of the Finance Act, 1994 with a view to levy service tax on ‘legal consultancy services’. The said clause is extracted below:
“(zzzzm) to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner:
Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.
Explanation. – For the purposes of this sub-clause, ‘business entity’ includes an association of persons, body of individuals, company or firm, but does not include an individual.”
Nature of Services covered
3. The proposed levy is to cover services ‘in relation to advice, consultancy or assistance in any branch of law, in any manner’. However, services provided ‘by way of appearance before any court, tribunal or authority’ are excluded. In a clarification dated 6-7-2009 issued by the Ministry of Finance, the term ‘authority’ has been clarified to mean a statutory authority.
4. The exclusion for ‘services ‘by way of appearance before any court, tribunal or authority’ is likely to create some confusion. These are discussed below.
5. A question may arise whether services which are integrally connected with appearance are taxable or not? For instance, billings for ‘perusing case papers, conferences in connection with appearances, briefing of counsels / senior counsels, research work connected with the appearance, drafting of counter affidavits, rejoinders, miscellaneous applications or synopsis of submissions etc. in the course of appearance before the courts should logically speaking also get excluded as being an integral part of the service of appearance in a Court. However, since the above-referred clause uses an expression by way of ‘appearance before any court, tribunal or authority’, revenue is likely to contend that it is only service of actual appearance before the courts, tribunals or authorities that gets excluded and not services rendered prior to or after such appearance, even if such services are integrally connected and are necessary for the appearance.
Who are covered
6. The proposed levy applies only to a ‘business entity’ who renders advice, consultancy or assistance in any branch of law. The expression ‘business entity’ has been defined in an inclusive manner to include the following:
a) an association of persons;
b) body of individuals;
c) company, or
but does not include an individual. A circular dated 6-7-2009 issued by the Ministry of Finance clarifies the position further by stating:
“Services provided by an individual advocate, either to an individual or even to a business entity, would be outside the scope of the taxable service”.
The above circular is in line with the FM’s speech, in which he has clarified that the service tax would not be applicable in case ‘the service provider or the service receiver is an individual’.
7. One issue which is likely to create some controversy is whether the expression ‘business entity’ would include a proprietorship concern run in a name different from the name of an individual. For instance, if an advocate, Mr ABC carries on his profession in the name ‘ABC Legal’, the question that may arise is whether the billings made in the name of ABC Legal are taxable as a service rendered by a business entity and not by an individual.
8. The answer to the above question will have to be found in the definition of ‘business entity’, which seems to indicate that proprietorship concerns which, in law do not have any separate entity or status vis-à-vis its proprietor, are excluded from the term ‘business entity’. The term ‘association of persons’, ‘body of individuals’, ‘company’ and ‘firms’ – all refer to bodies of two or more individuals who carry on business in the name of a ‘distinct business entity’. Though the expression ‘firm’ appearing in the definition of ‘business entity’ may create some confusion as it is sometimes used (in a loose sense) to refer also to proprietorship concern, the legal meaning of the term ‘firm’, which refers to a partnership firm, that will prevail. In its usual sense, the expression ‘business entity’ refers to various kinds of legal entities that the courts recognize as having some of the rights and obligations of a natural person, distinct from its owners. Going by this meaning, a proprietorship concern cannot be considered to be a business entity, as it is not distinct from its owner. The inclusive definition of ‘business entity’ proposed to be given in the Finance Bill, 2009 is, in the author’s view, no different from its natural meaning and in fact clarifies the situation by expressly excluding individuals and consequently proprietorship concerns.
9. Another question which may lead to some dispute is whether a firm of professionally qualified Advocates can be considered to be a ‘business entity’. Since the FM, in his speech, has referred to his predecessor, it appears that his intention certainly was to cover lawyers within the ambit of the proposed levy. However, the clause as it is presently worded is likely to create some confusion as it proposes to cover only a ‘business entity’ and makes no reference either to advocates or to the expression ‘profession’.
10. In common parlance, as well as in law, the expressions ‘business’ or ‘profession’ are considered distinct and separate. Practising a profession and carrying on any trade or business are two distinct activities. In Sukhram vs Nagpur Corporation, AIR 1964 Bom 200, the following observations were made by Bombay High Court:
“Any activity which can justly be called a commercial activity, must imply some investment of capital and the activity, must run the risk of profit or loss …… A lawyer’s profession is not a kind of profession which can be said to be carried on as profession of commercial nature. It is not a commercial activity and the very nature of the work is such that it is incapable of being of a commercial nature. An activity to be a profession must be one carried on by an individual by his personal skill, intelligence or dependant on individual characteristic ….. It is the personal skill, intelligence, study, integrity which is the core of a professional activity.”
The following passage from the decision of the British Court of Appeal in Currie vs Commissioner of Inland Revenue (1921) 2 Kings Bench Division 322, which finds reference in Gujarat High Court decision in the case of Institute of Chartered Accountants vs UoI, 2006 (2) STR 300 Guj., is also very relevant:
“Whether a profession is exercised or not …… , the fact that the particular man is a member of an organized professional body with a recognized standard of ability enforced before he can enter it and a recognized standard of conduct enforced while he is practicing it …..”
I do not, for a moment, say it settles the matter, but if I were deciding a question of profession, I should attach some important (sic) [importance] to that particular feature.
11. The Madras High Court in M/s L M Chitale vs Labour Commissioner, AIR 1964 Mad 130 has also taken a view that it cannot be said that a profit motive underlies the carrying on of a profession or an occupation and therefore there is a material difference between carrying on profession on one hand, and carrying on occupation, trade or business on the other hand.
12. Since the proposed levy is intended to cover legal consultancy services rendered by a ‘business entity’ as distinct from a ‘professional entity’, a viewpoint may exist that the proposed levy will not cover legal services rendered by professional firms of advocates. The proposition that lawyers are engaged in ‘business’ is likely to receive strong objection, as such a proposition wipes off the distinction between profession and business.
13. The above argument, though attractive on first blush, has its limitations. Firstly, the FM’s speech and the TRU Circular leave no scope for doubt that the intention behind the proposed levy is to cover lawyers also. Secondly, the expression ‘ business entity’ refers to the legal form of the organization carrying on any business or profession. Viewed in this sense, it may not be inappropriate to term a partnership firm (of lawyers) to be a ‘business entity’. Though the use of the term ‘business’ in the context of a firm of professionals is a bit mis-leading, the Courts may not ultimately attach undue importance to this one aspect, considering the fact that the proposed levy is on a particular kind of service, i.e. legal service. The emphasis in the definition is clearly on the nature of service, i.e. ‘advice, consultancy or assistance in a branch of law’ and not on the category of persons who render such service. Unlike in the case of CAs, Cost Accountants and Company Secretaries, where the levy is restricted to professionally qualified and practising professionals, the proposed definition of ‘legal consultancy service’ has been kept open ended to include both practising advocates as well as non-advocates who are rendering legal advice. In this sense, the definition is similar to the definition of ‘management or business consultant’, where the word ‘profession’ finds no mention.
Whether the proposed levy is constitutionally valid
14. The issue of constitutional validity of the proposed levy has to be examined from the following three standpoints:
a) whether the proposed levy of tax is a tax on ‘professions, trade, callings and employment’, which by virtue of Article 276 of the Constitution is within the exclusive domain of the State Legislature;
b) whether the proposed levy is discriminatory or unreasonable in any manner so as to violate Article 14 of the Constitution; and
c) whether the proposed levy can be struck down as unconstitutional on the ground that it is against the spirit of the Constitution or the Directive Principles of State Policy in Article 39A of the Constitution.
The first two issues seem to have got settled by virtue of the Supreme Court’s judgement in All India Federation of Tax Consultants Association vs Union of India, 2007 (7) STR 625 (SC), and that of the Gujarat High Court in the case of Chartered Accountants’ Association vs Union of India, 2006 (2) STR 300 (Guj.). The apex courts held that the expression ‘taxes on professions, trade, callings and employment’ should be read as being a levy on professions, trade, callings etc. as such and not on services rendered by professionals.
Therefore, the proposed levy of service tax is not a tax on the profession itself but is a tax on the service being provided by professionals, which is well within the competence of the Union.
15. A challenge on the ground on discrimination is also unlikely to succeed, as the proposed levy seeks to cover all kinds of persons rendering legal services. Since the proposed levy is not intended to cover only professionally qualified advocates, the question of holding that the levy discrimination would not arise, except to the extent that a firm of lawyers may contend that there is no intelligent differentia existing between the class of lawyers who practice in their individual names, and those who are practising as partners in a partnership firm. This, in my opinion, is the only point on which a challenge to the proposed levy on the ground of discrimination may have some substance.
16. The third issue also stands resolved by a judgement of the Kerala High Court, in the case of Malappuram Distt. Parallel College Assn. vs UoI, 2006 (2) STR 321 (Ker), where the court held that levy of service tax on education cannot be considered against the spirit of the Constitution of India or the Directive Principles of State Policy. The reasons stated in the judgement, in my view, apply squarely in the context of the present levy.
17. In the above article, I have made an attempt to identify a few grey areas in the proposed legislation, which should engage the minds of the professionals, bureaucrats and legislators alike. Let me end this article with the hope that these grey areas are redressed by suitably modifying the language used in sub-clause (zzzzm).
Authored by; Vipin Jain, Advocate