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Legal services- the short history and analysis.

DEVKUMAR KOTHARI

Legal Consultancy Services Taxable from 2009; Expanded to Representational and Arbitration Services in 2011 Legal consultancy services became subject to service tax from September 1, 2009, primarily when provided by business entities to other business entities. Initially, services such as advice, consultancy, or assistance in law were taxable, excluding those offered by individuals or for court appearances. A significant amendment effective May 1, 2011, expanded taxable services to include representational services and arbitration provided to business entities. The definition of 'business entity' excludes individuals, and arbitral tribunals are now taxable for services to business entities. However, services provided by individuals remain largely non-taxable, leading to potential litigation over definitions and classifications. (AI Summary)

The Legal Consultancy service was brought under Service Tax net from 01.09.2009 mainly when rendered by business entities to business entities. The Taxable service was defined under sub-clause (zzzzm) of clause (105) of Section 65 of the Finance Act, 1994. The Legal services provided to a business entity by any other business entity in relation to advice, consultancy or assistance in any branch of law were covered however, such services provided by a non business entity / individual was not taxable. Services provided by way of appearance before any court, Tribunal or any authority and the services provided by the individuals were not taxable.

After the recent amendment which became effective from 01.05.2011 we find significant changes in concept about taxable service in this category.

Legal services:

The present definition and other relevant meanings are reproduced with highlights by underlining for an easy analysis and understanding. Besides important amendemtns have also been referred or reproduced for easy reference:

Section 65 - Definitions (Clause 105) - Taxable Services

(105) 'taxable service' means any service [provided or to be provided]1, -

[(zzzzm) (i) to any person,by a business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner;

(ii) to any business entity, by any person, in relation to representational services before any court, Tribunal or authority;

(iii) to any business entity, by an arbitral Tribunal, in respect of arbitration.

Explanation.—For the purposes of this item, the expressions “arbitration” and “arbitral tribunal” shall have the meanings respectively assigned to them in the Arbitration and Conciliation Act, 1996 (26 of 1996);]

Definition of business entity as per S. 65 (19b):

(19b) 'business entity' includes an association of persons, body of individuals, company or firm but does not include an individual;]

Note :This was inserted vide FA 2010 w.e.f. 01.07.2010 by the same amending enactment similar definition provided by way of Explanation was omitted from the S.65(105) (zzzzm)

Adopted definitions:

From the Arbitration & Conciliation Act, 1996

2.Definitions.- (1) In this Part, unless the context otherwise requires,-

(a) 'arbitration' means any arbitration whether or not administered by permanent arbitral institution;

(d) 'arbitral tribunal' means a sole arbitrator or a panel of arbitrators;

Comparison of old and new provisions:

In the following table old and new provisions are tabulated. Underlining is provided where changes have made significant changes in legal implications:

New definition

Old definition

Remarks

Section 65 - Definitions (Clause 105) - Taxable Services

(105) 'taxable service' means any service provided or to be provided, -

Section 65 - Definitions (Clause 105) - Taxable Services

(105) 'taxable service' means any ¹[service provided or to be provided], -

No recent change, changes in this heading were before this service was brought into taxnet.

⁶⁴[(zzzzm) (i) to any person, by a business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner;

“(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:

Consultancy etc. rendered to any person by any business entity is now taxable.

Earlier services rendered to non business entity was not taxable.

Non-business entity was not and is not taxable service provider in relation to advice, consultancy, or assistance in nay branch of law in any manner..

(ii) to any business entity, by any person, in relation to representational services before any court, Tribunal or authority;

Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.”

Earlier appearance before court, tribunal, or authority was not considered as taxable service by way of specific proviso.

Now representational services are considered as taxable services if rendered by any person to any business entity by way of new sub-clause (ii).

(iii) to any business entity, by an arbitral Tribunal, in respect of arbitration.

This is a new class of legal service to impose tax on arbitral tribunal in case of services are rendered to a business entity.

To whom services are rendered- petitioner/ claimant and /or opposite party is a gray area.

Adopted definitions are as follows –

‘Arbitration’ means any arbitration whether or not administered by permanent arbitral institution

‘Arbitral Tribunal’ means a sole arbitrator or a panel of arbitrators.

59. In sub clause (zzzzm) Explanation has been omitted vide Finance Act, 2010 w.e.f 01.07.2010, before it was read as, '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;'

The explanation that is meaning of ‘business entity’ was earlier omitted and simultaneously a definition was provided in the definition clause as follows:

[(19b) 'business entity' includes an association of persons, body of individuals, company or firm but does not include an individual;]

{ Inserted vide Finance Act 2010 w.e.f 01.07.2010}

On an analysis we find that:

There are two classes of service provider namely

(a) a business entity - as per specific meaning it includes only AOP, BOI , firm (means partnership firm), company) and an individual is specifically excluded.

(b) a non business entity (that is individual having been specifically excluded , therefore, a concern of individual that is a proprietary concern of individual shall also be excluded from scope of business entity similarly a HUF shall also be not be considered a business entity because HUF is a special class and is not an AOP or BOI).

Any professional qualification or membership of any institution is not necessary. It is not necessary that the service provider should necessarily be an advocate or solicitor. This taxable service is specifically made applicable even to companies, AOP and BOI. Therefore, any person- individual, AOP, BOI, Firm or company rendering specified type of services in field of any branch of law will have to check, whether he is rendering any service which is taxable and whether he is one of type of service provider who is liable to pay tax?

Expanded scope of services:

(a) Business entity- services provided even to an individuals in relation to advice, consultancy or assistance in any branch of law is now taxable. Earlier it was not taxable.

(b) Business entity and individuals: - services to represent before a judicial or quasi-judicial authority (court, tribunal or authority) is now taxable. Earlier such services were not taxable, Even in cases of practicing CA/ CWA and CS such services were exempted by a notification which has now been withdrawn w.e.f. 01.05.2011 to make legal services provided for representations as taxable in all cases )

(c) Arbitral Tribunals: they have been made new entity liable to tax for arbitration service provided to any business entity.

In this regard 'arbitration' means any arbitration whether or not administered by permanent arbitral institution and ) 'arbitral tribunal' means a sole arbitrator or a panel of arbitrators.

As per general understanding 'arbitral tribunal' will be different in case of each arbitration matter. For example, suppose Mr. S has acted as an arbitrator in the following five cases:

A Vs. B

C Vs. D

E Vs. F

G vs. H

X Vs. Y

There are five arbitral tribunals in which Mr. S was arbitrator.

Mr. S himself in his personal capacity is not an arbitral tribunal.

He becomes and acts as an arbitral tribunal only when he is hearing any case and deciding any case which has been referred to him as an arbitrator. Thus arbitral tribunal is decided vis a vis a particular dispute which has been referred to him.

Similar will be situation if suppose Mr. S, Mr. T and Mr. U were appointed as joint arbitrators in above five cases. In that cases association of three persons is not an arbitral tribunal. There will five different Arbitral Tribunals in relation to five cases. This view is also logical because at any point of time, in some situations there can be change in arbitrators.

A person acting as arbitrator cannot be regarded as arbitral tribunal, he singly or with some other arbitrators (in particular case), as the case may be constitute ''arbitral tribunal', therefore, it may be that each arbitral tribunal shall be considered as a separate unit of service provider. If it is not so intended, then an amendment is desirable.

The better course would be to include services rendered by any individual as arbitrator in the scope of legal services instead of making arbitral tribunal a separate entity liable to tax.

Services remaining out of tax net:

Representational services provided to individuals by an individual as well as by business entity is exempt.

Also services provided by individuals in nature of consultancy, assistance, etc. remain outside tax net.

Scope of doubts and litigation:

We find that two different expressions used in relation to the same service are 'by a business entity' and 'by any person' .

It can be considered that both have different purposes and meanings therefore, a possible view is that expression 'any person' in this context does not include persons who are covered by scope of 'business entity' . This will be a point of litigation. It can be said that definition of ‘person’ as per the General Clauses Act is not relevant in relation to these provisions because certain type of persons who are covered by ‘person’ under the General Clauses act have been categorized into a separate class described as ‘business entity’.

Inconsistent approach:

We find that over a very short period of time inconsistent approach has been shown by legislators. Earlier representational services were exempted for advocates, CA/CWA/CS. Suddenly they have been made taxable. There is no fundamental change in any relevant facts and circumstances and factors. Then why this abrupt change in legislative intention? This is not understandable. Is it really legislative intention or just bureaucratic whim being legislated?

Suggestions:

It will now be advisable to negotiate and charge separately for taxable and non taxable services and negotiate separately for consultancy, guidance, assistance etc. and appearance/ representation before courts and authorities.

Bills/ receipts for services up to 30^th April be made separately and for services rendered from 01.05.11 separately. Separate ledger accounts can be maintained to keep a check on the cumulative amount received under taxable category in case of new taxable service provider who need to apply for registration in case receipts on taxable services account crosses Rs. none lakh.

Tabular presentation of legal services:

Service provider	Service receiver	Service	Taxability
Individuals (non business entity)	Individuals and non business entity	Any kind of legal services- consultancy and representational both	Not taxable
Individuals (non business entity)	Business entity	Advice, consultancy & assistance in any branch of law.	Not taxable
Individual (non business entity)	Business entity	Representational services.	Taxable
Business entity	Business entity	Any kind of legal services- consultancy and representational both	Taxable
Business entity	Individuals	consultancy , advisory and legal assistance etc. in any branch of law	Taxable
Business entity	Individual	Representational services.	Not taxable
Arbitral Tribunal	Business entity	Acting as arbitral Tribunal	Taxable.
Arbitral Tribunal	Individual and non business entity	Acting as arbitral Tribunal	Not taxable

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