Legal services- the short history and analysis.

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:

 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:

 Other articles on the subject:

Readers can fruitfully refer to the following articles on the same subject to understand short history of service tax on legal services in India and some more related aspects.

NEW SCOPE OF LEGAL SERVICES at https://www.taxtmi.com/article/detailed?id=1274By: Dr. Sanjiv Agarwal

CHANGES IN SERVICE FROM MAY, 2011 at https://www.taxtmi.com/article/detailed?id=1268 by Dr. Sanjiv Agarwal

Expansion of scope of Legal Consultancy Service at https://www.taxtmi.com/article/detailed?id=1191 By: Pradeep Jain

Service tax- EXEMPTIONS AS WELL VARIATIONS IN EXEMPTIONS SHOULD BE ON SATISFACTION AND TO SERVE PUBLIC INTEREST an illustrative study. At https://www.taxtmi.com/article/detailed?id=1071 by C.A. DEV KUMAR KOTHARI

Budget 2009: Levy service tax on legal services and not on any particular profession. At https://www.taxtmi.com/article/detailed?id=412 By: C.A. DEV KUMAR KOTHARI

SERVICE TAX ON LEGAL SERVICES - NOT A TAX ON ADVOCATES at https://www.taxtmi.com/article/detailed?id=411 By: Dr. Sanjiv Agarwal :

Readers are requested to send their feedback and suggestions to improve knowledge on the subject and to remove shortcoming, if any.