2013 (2) TMI 55 - HC - Service Tax

Court Quashes Circulars Contrary to Law, Affirms Service Tax Rate Precedence

The court quashed Circular No.158/9/2012-ST and Circular No.154/5/2012-ST as they were found to be contrary to the Finance Act, 1994 and the Point of ... Point of taxation - determination of point of taxation under Rule 4(a)(ii) - change in effective rate of tax - validity of circulars - statutory force of delegated legislationValidity of circulars - ultra vires - statutory force of rules - Circulars No.154/5/2012-ST dated 28.03.2012 and No.158/9/2012-ST dated 08.05.2012 are inconsistent with the Finance Act, 1994 and the Point of Taxation Rules, 2011 and therefore liable to be quashed. - HELD THAT: - The Board circulars proceeded on the erroneous premise that the substituted Rule 7 (w.e.f. 01.04.2012) continued to cover the eight specified services (including services of chartered accountants) which were covered by the old Rule 7. A comparison of the old and the new Rule 7 shows that the new Rule excludes the services earlier specified in clause (c) and only covers recipients of service in respect of services notified under section 68(2). The Point of Taxation Rules, 2011 were made under Section 94 and have the force of law; circulars must conform to the Act and the Rules. A circular contrary to the statutory provisions has no legal existence and cannot be enforced. For these reasons the impugned circulars, insofar as they apply the enhanced rate by treating payment after 01.04.2012 as attracting the new rate for the eight specified services, are ultra vires and are quashed. [Paras 11, 16, 17, 18]Impugned circulars quashed as contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011; writ petitions allowed.Point of Taxation Rules, 2011 - Rule 4(a)(ii) - change in effective rate of tax - Where a taxable service was rendered and the invoice issued before the change in effective rate of tax, but payment was received after the change, the point of taxation is the date of issuance of the invoice under Rule 4(a)(ii), and the earlier rate applies. - HELD THAT: - Rule 4 of the Point of Taxation Rules, 2011 specifically governs situations of a change in the effective rate of tax and operates notwithstanding Rule 3. Clause (a) of Rule 4 deals with services provided before the change in rate and contains three mutually exclusive sub-clauses. Sub-clause (ii) applies where the service was provided and invoice issued before the change but payment is received after the change; it deems the date of issuance of the invoice to be the point of taxation. Applying this to services of chartered accountants rendered and invoiced before 01.04.2012 but paid for after that date, the point of taxation is the invoice date and the rate prevailing on that date (10%) governs, not the subsequently enhanced rate. [Paras 13, 14, 15]For services rendered and invoiced before 01.04.2012 but paid after that date, the point of taxation is the invoice date under Rule 4(a)(ii), and the earlier rate applies.Final Conclusion: Writ petitions allowed; impugned Board circulars quashed for being contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011; where services were rendered and invoiced before 01.04.2012 but paid thereafter, the point of taxation is the invoice date and the earlier rate applies; no order as to costs. Issues Involved:1. Validity of Circular No.158/9/2012-ST dated 08.05.2012 and Circular No.154/5/2012-ST dated 28.03.2012.2. Determination of the taxable event under the Finance Act, 1994 and the applicable rate of service tax.Issue-wise Detailed Analysis:1. Validity of Circular No.158/9/2012-ST and Circular No.154/5/2012-ST:The petitioner, an association of Chartered Accountants, challenged the validity of the aforementioned circulars, arguing that they are ultra vires the Constitution of India and the Finance Act, 1994. The circulars were issued by the Tax Research Unit of the CBEC and provided guidance on the applicable rate of service tax in cases where services were rendered, and invoices were issued before 01.04.2012, but payments were received after this date. The petitioner contended that these circulars cannot override the statutory provisions or rules made under the Finance Act, 1994.The court noted that Rule 7 of the Point of Taxation Rules, 2011 was substituted by a new rule effective from 01.04.2012. The new Rule 7 did not cover services rendered by chartered accountants, which were previously covered under the old Rule 7. Both circulars erroneously assumed that the old Rule 7 continued to apply even after the introduction of the new Rule 7. The court held that the circulars were issued on an incorrect basis and thus quashed them as being contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011.2. Determination of the Taxable Event and Applicable Rate of Service Tax:The court examined the provisions of the Finance Act, 1994, specifically Sections 66, 66A, 67, 68, 93, and 94, which govern the levy, valuation, payment, exemption, and rule-making authority concerning service tax. The crux of the issue was the determination of the taxable event for the purpose of service tax and the applicable rate, especially in light of the Point of Taxation Rules, 2011.The Supreme Court in Association of Leasing and Financial Service Companies v. UOI & Ors. held that the taxable event is the rendition of the service. However, the Point of Taxation Rules, 2011, specifically Rule 4, provided guidance on determining the point of taxation in case of a change in the effective rate of tax. Rule 4(a)(ii) was particularly relevant, stating that if the service was provided and the invoice issued before the change in the effective rate of tax, but payment was received after the change, the point of taxation would be the date of issuance of the invoice.The court noted that in the present case, all services were rendered and invoices issued before 01.04.2012, but payments were received after this date. According to Rule 4(a)(ii), the point of taxation would be the date of issuance of the invoice, thus the applicable rate of service tax would be 10%, not the enhanced rate of 12%.Conclusion:The court quashed the circulars as they were contrary to the statutory provisions and the Point of Taxation Rules, 2011. It affirmed that the rate of service tax applicable in the case where services were rendered and invoices issued before 01.04.2012, but payments received after this date, would be 10% as per Rule 4(a)(ii). The court reiterated that circulars cannot override the statutory provisions and rules, and any such circulars have no existence in law. The writ petitions were allowed, and the circulars were quashed, rendering prayer (b) in the writ petition infructuous.