2013 (2) TMI 52 - HC - Service Tax

Court Invalidates Tax Instruction, Emphasizes Taxable Event

The court declared the instruction dated 28.04.2008 invalid as it contradicted established law, specifically regarding the rate of service tax for Works ... Taxable event is rendition of service - rate of service tax determined by date of rendition of service and not date of receipt of payment - applicability of service tax to Works Contract Service - invalidity of administrative instruction/circular contrary to binding judicial precedent - non-binding character of executive circulars when inconsistent with statutory scheme and judicial decisionsTaxable event is rendition of service - rate of service tax determined by date of rendition of service and not date of receipt of payment - applicability of service tax to Works Contract Service - Rate of service tax for Works Contract Service must be determined with reference to the date on which the service was rendered and not the date on which payment was received. - HELD THAT: - The court accepted the binding authority of the Supreme Court in Association of Leasing & Financial Service Companies, holding that the taxable event for service tax is the rendition of the service and not receipt of payment. Applying that principle, the services in these petitions were admittedly rendered prior to 01.03.2008 when the rate was 2%, whereas receipt of payment occurred after 01.03.2008 when the rate had been increased to 4%. The court rejected the respondents' interpretation (as reflected in the impugned instruction) that service tax becomes chargeable on receipt of payment irrespective of when the service was rendered. The absence at the relevant time of later-introduced statutory provisions and rules (such as Rule 5B, Section 67A, and the Point of Taxation Rules) was noted, and the court relied on the statutory scheme under the Finance Act, 1994 and settled judicial precedent to determine the taxable event. [Paras 7, 8, 9]The applicable rate is the rate in force on the date the service was rendered; therefore the lower rate prevailing before 01.03.2008 applies to the services in question.Invalidity of administrative instruction/circular contrary to binding judicial precedent - non-binding character of executive circulars when inconsistent with statutory scheme and judicial decisions - Instruction dated 28.04.2008 issued by the Tax Research Unit is invalid to the extent it directs that rate of service tax is to be determined by date of receipt of payment rather than date of rendition, and consequential demands based on that instruction are liable to be set aside. - HELD THAT: - The impugned instruction expressly states that the rate in force when payment is received governs the taxable transaction. The court held that such an instruction is contrary to the law declared by the Supreme Court that the taxable event is rendition of service. Relying on authoritative precedent that executive circulars cannot prevail over judicially declared law, the court declared the instruction to have no existence in law. Because the contested show cause notices and the adjudication order were founded on that instruction, those demands and the adjudication order (to the extent indicated) were set aside. The court also rejected the contention that the petitioners must first exhaust statutory remedies before seeking writ relief, observing that so long as the invalid instruction governed departmental action there would be no effective remedy before the authorities. [Paras 10, 11, 12, 13, 14]Instruction dated 28.04.2008 is invalid; consequential show cause notices and the adjudication order are set aside to the extent they apply the higher rate based on date of receipt.Final Conclusion: Writ petitions allowed insofar as the impugned demand rests on application of the higher rate by reference to date of receipt; the instruction dated 28.04.2008 is declared invalid and the contested show cause notices and the adjudication order are set aside to that extent. Issues involved:1. Challenge against the instruction dated 28.04.2008 issued by the Tax Research Unit, Department of Revenue, Ministry of Finance, Government of India.2. Applicability of the rate of service tax in respect of Works Contract Service defined in Section 65(105)(zzzza) of the Finance Act, 1994.3. Validity of the instruction dated 28.04.2008 in determining the rate of service tax based on the date of receipt of payment rather than the date of rendition of service.4. Challenge to show cause notices and demands raised against the petitioner based on the invalid instruction.Detailed Analysis:1. The writ petitions challenged the instruction dated 28.04.2008, contending it was contrary to the law as declared by the Supreme Court. The main issue revolved around the applicability of the rate of service tax for Works Contract Service rendered before the rate increase from 2% to 4% on 01.03.2008. The respondents argued that the rate should be determined based on the date of payment receipt, not the service rendition date.2. The court highlighted that the taxable event for service tax is the rendition of service, not the receipt of payment. Citing the Supreme Court's ruling in a previous case, it emphasized that the date of service agreement is irrelevant for determining the applicable tax rate. The court noted that the relevant periods for the two writ petitions were before the rate increase, making the 4% rate inapplicable.3. The court analyzed the legal provisions applicable at the time, noting the absence of specific rules like Rule 5B of the Service Tax Rules, 1994 or Section 67A of the Finance Act, 1994. Referring to a previous case, it reiterated that the taxable event is the provision of taxable services, aligning with the Supreme Court's interpretation.4. Ultimately, the court declared the instruction dated 28.04.2008 invalid as it contradicted the law established by the Supreme Court. Consequently, the show cause notices and demands based on this instruction were also deemed invalid. The court rejected the argument of alternative remedies, stating that as long as the instruction remained valid, statutory authorities would continue to apply it, leaving the petitioner without recourse.5. The court set aside the adjudication order dated 28.03.2012 to the extent indicated, emphasizing that the instruction's invalidity rendered the related proceedings null and void. The decision underscored the supremacy of court rulings over conflicting instructions, ensuring adherence to established legal principles in tax matters.