POINT OF TAXATION IN SERVICE TAX – JUDICIAL SCRUTINY

Law prior to 1.7.2012

There was no specific provision for point of taxation.  However, prior to these rules, basis of taxation was based on –

(a)      taxable services provided or to be provided [section 65(105)]

(b)      Charge of service tax on the taxable services (section 66)

(c)      Payment of service tax within the specified period from the end of quarter or month, as the case may be, in which the payment is received (Rule 6)

(d)      Payment of service tax on advance received (section 67)

Law w.e.f. 1.7.2012

Point of Taxation Rules, 2011, as notified by Notification No 18/2011-ST dated 1.3.2011 are applicable w.e.f. 1 April 2011 and amended by Notification No. 25/2011-ST dated 31.3.2011 and Notification No. 41/2011-ST, dated 27.6.2011, Notification No. 4/2012-ST, dated 17.3.2012 and Notification No. 37/2012-ST dated 20.6.2012. These rules determine the point in time when the services shall be deemed to be provided. The general rule will be that the time of provision of service will be the earliest of the following dates:

a)    Date on which service is provided or to be provided

b)    Date of invoice

c)    Date of payment

Legislative Background 

For the first time since the introduction of levy of service tax in India, the Government had notified the Point of Taxation Rules, 2011vide Notification No. 18/2011-ST dated 1.3.2011 and amended from time to time which have been made effective from April 1, 2011. These rules determine the point in time when the services shall be deemed to be provided.

Consequential changes have also been made in the Service Tax Rules, 1994 to alter the payment of service tax from receipt of payment to provision of service and also to permit adjustment of tax when service is not finally provided.

Judicial Interpretation

The following judicial interpretation are worth noting an relation to levy of Service Tax and Point of Taxation -

• In CCE v. Vazir Sultan Tobacco Co. Ltd. 1996 (2) TMI 138 - SUPREME COURT OF INDIA wherein it was held that excise duty is a levy on manufacture of excisable goods and as such, excise duty would be levied on goods if such goods were excisable at the time of manufacture.

• In Commissioner of Central Excise and Customs v. Schott Glass India Private Ltd, 2009 (1) TMI 45 - HIGH COURT OF GUJARAT, Court held that the taxable event in relation to service tax is admittedly the rendering of taxable service. Thus, the liability to pay service tax arises on the date on which the taxable service is provided and not on the date on which the bill is raised or the payment is received. Similar position in this regard has been upheld in the case of CCE v. Reliance Industries Ltd., 2009 (7) TMI 717 - GUJARAT HIGH COURT wherein the Court held that the rate prevailing at the time of provision of service is relevant and not the rate prevailing at the time of billing and receipt of payment.
  

• In Sudesh Sharma v Commissioner of Central Excise, Ludhiana, 2009 (9) TMI 529 - CESTAT, NEW DELHI , it was held that though the liability for service tax arises on the date on which the service is provided, by virtue of Rule 6(1) of the Service Tax Rules, 1994, the service tax is payable only by the 5^th Day of the month immediately following the calendar month in which the payment for the service is provided is received towards the value of the taxable service. Since unlike Rule 5 of the Central Excise Rules, 2002 providing that rate of duty applicable to excisable goods shall be the rate in force on the date of removal of the excisable goods, there is no such similar provision in Chapter V and VA of the Finance Act, 1994, or in the Service Tax Rules, 1994, regarding the relevant date for determining the rate of tax. Therefore, in Service Tax, the rate applicable would be the rate in force on the date on which the taxable event of providing the taxable service occurs, not the date on which the bill is raised or payment is received. [Also see Bajaj Allianz General Insurance Co. Ltd. v. Commissioner of Central Excise, Pune, 2008 (10) TMI 72 - CESTAT MUMBAI ); LFC Hire Purchase Company Ltd. v. CCE (Appeals) 2008 (5) TMI 67 - CESTAT, BANGALORE ; M/s Art Leasing Ltd. v. CCE, Cochin, 2007 (6) TMI 217 - CESTAT, BANGALORE].

• In Delhi Chartered Accountants Society (Regd.) v. Union of India 2013 (2) TMI 55 - DELHI HIGH COURT, High Court has held that Circular Nos. 154/5/2012-ST dated 28.3.2012 and 158/9/2012-ST dated 8.5.2012 issued by CBEC are contrary to law and rules and hence quashed. It was held that on account of deletion of reference to Chartered Accountant's Service in Rule 7(C) of POT Rules w.e.f. 1.4.2012, CA services ceased to be covered by Rule 7. Accordingly Rule 7 was inapplicable to services provided and invoices raised before 1.4.2012 even if the payment was received on or after 1.4.2012. Such contingency was covered by Rule 4 (a)(ii) and the point of taxation would be date of raising of invoice. Thus, rate of Service Tax applicable was 10 per cent and the position is that the new Rule 7 w.e.f. 1.4.2012 does not provide for the determination of point of taxation in respect of services rendered by chartered accountants. It was further held that the subject circulars proceed on erroneous basis that new Rule 7 of POT Rules covered CA Services. Circular No. 154 is erroneous in prescribing that invoices issued on or before 31.03.2012 continued to be governed by Rule 7 as it stood before 1.4.2012 since w.e.f. 1.4.2012, old Rule 7 was no longer in existence. Circular No. 158 is erroneous in prescribing that eight specified services, including CA services, if payment is received/made after 1.4.2012, needs to pay 12 percent Service Tax, since new Rule 7 does not include CA services as it existed prior to 31.03.2012.

The situation is governed by rule 4(a)(ii), which is continued after 1.4.2012 and prescribes that where service has been provided and invoice has been issued prior to change in effective rate of tax but payment is received thereafter, then date of issuance of invoice is deemed to be date on which service was rendered and, consequently, the point of taxation. Since the circulars have not taken note of this aspect, they are contrary to Finance Act, 1994 and Point of Taxation Rules, 2011.

• In Impresa Costruzioni Comm. Quirino Mazzalai v. Ferrovia del Renon (2013) 39 STT 760 (ECJ), where service recipient made belated payment for services provided six years back and where rate of tax at the time of service was 4 percent while at the time of payment was 12 percent, it was held that since payment of consideration was made six years after provision of service, rate of tax prevalent at the time of provision of service was the applicable tax rate. (Rule 3).

• In CST, Delhi v. Consulting Engineering Services (I) (P) Ltd 2012 (7) TMI 410 - CESTAT, NEW DELHI, since assessee had provided services and raised bills prior to 14-5-2003, but had received payment thereafter, it was held that taxable event under Finance Act , 1994 is providing  of taxable service. Hence, mere receipt of payment thereafter would not change date on which taxable event had taken place. Provision of Rule 5B of Service Tax Rules,1994, Point of Taxation Rules, 2011 and Section 67A could not be relied upon, as they were not in force during material period.

• In CST, Delhi v. Consulting Engineering Services (I) Pvt. Ltd. 2013 (1) TMI 434 - DELHI HIGH COURT, it was held that receipt of payment for services cannot change the date of taxable event. Date of receipt of payment was immaterial and date of provision of service was relevant and applicable. Rule 4 (a) (i) of Point of Taxation Rules, 2011 and section 67A of the Finance Act, 2012 were inapplicable to transactions prior to such period (2003 in this case).