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Applicability of service tax provisions
June, 22nd 2009

A recurring issue in service tax law is regarding the effective date of coming into force of various provisions, as contained in the Finance Act 1994. These provisions could pertain to introduction of new conditions and definitions as also changes in the underlying rates of taxes. This article seeks to briefly discuss this issue.

With regard to the problem posed in relation to the introduction of new conditions, one example is with regard to those relating to associated enterprises, which were introduced in the service tax law with effect from 10th May 2008. These provisions hold that the liability to service tax, in case of provision of a taxable service where the service provider and the service recipient were associated enterprises, arises either on payment of consideration for the service or on accruals, in the books of accounts of such consideration, whichever is earlier.

Thus, the taxation of these transactions is an exception to the general principle that the tax is only payable upon receipt of consideration for the services so rendered. The question that is relevant here is whether these provisions would apply to transactions between associated enterprises prior to the date of their coming into effect for which accrual entries have also been made earlier as also to services provided prior to the date but with regard to which the accounting entries are made subsequent thereto.

The principles of interpretation of statutes in order to determine the dates of coming into force of particular provisions, require a differentiation between substantive provisions and clarificatory provisions. In the case of substantive provisions, which have the effect of introducing entirely new conditions or definitions, as the case may be, the principle is that they are effective only prospectively on and from the date of their coming into force. On the other hand, clarificatory provisions, i.e. those which merely clarify or amplify what was already intended and apparent in existing provisions, are applicable retrospectively and would hence be effective from the date on which the underlying provisions to which they relate were brought into force.

In terms of these princi-ples, it is clearly the case that the provisions relating to associated enterprises are prospective in operation from the date of their introduction and are not retrospective. Accordingly, these provisions would not apply to situations where accrual entries for consideration relating to taxable services rendered by associated enterprises prior to the aforesaid date are also made prior to the date.

The answer changes if the accounting entries for services rendered prior to the above date are made subsequent thereto. In such a situation, the liability to the service tax would be attracted since the new provisions would cover such accounting entries, in order to trigger the tax.

An argument similar to the above is equally relevant with regard to the date of coming into force of definitions under service tax law. To illust-rate the point, it is the correct position that where an activity is first brought within the service tax as a sepa-rate and independently identifiable service, the stat-ute would only apply to such activity on and from the date of its coming into force.

Therefore, the correct principle of interpretation is that services that are provided subsequent to the date of taxability are alone chargeable to the tax and services rendered prior to the date of their inclusion in the service tax ambit cannot be charged to the tax, notwithstanding that the consideration for such services were charged or received on or after that date.

The connected point which comes up frequently is whether activities which are covered under a new definition could at all be considered to be covered under any of the erstwhile definitions.

In various Tribunal decisions on the point, it has been held that where a particular service was made liable to service tax from a particular date and where there have been no changes in the definitions of the erstwhile taxable categories of services, it could not be argued that the newly taxable service was covered under any of the earlier existing categories.

The larger point here is that the newly inserted substantive law in the form of new definitions of taxable services ought to be understood to be effective only from the date of their coming into force and not earlier. Similar questions regarding the date of applicability have arisen in relation to provisions on advances received prior to rendering services and so on.

The fundamental point underlying these discus-sions is of course to do with the taxable event under service tax law, which is the provision of service.

The question that is to be answered in all situat-ions of interpretation of sta-tute, as discussed above, is therefore whether the taxable event, i.e. the provision or rendition of service, has taken place.

Accordingly, there are provisions in the service tax rules as well, which refer in many places to receipt of consideration and state that if at the time of provision of service, the services were not taxable, then no tax will be payable on such receipt of consideration. There are numerous Tribunal decisions reaffirming this fundamental position in law. Indeed, the following extract from the decision of the Tribunal in Reliance Industries Ltd. Vs. CCE [2008 TIOL (283) CESTAT] is very instructive:

The liability to service tax is on account of render-ing of the services. There are variations in matters relating to manner of collec-tion when compared to other taxes. It shall be normally paid by the person rendering services but in certain cases it shall be paid by the recipient of the services.

Similarly, it need not be paid on the date of rendering of services but subsequently at the time of receiving the service charges.

When the service tax is introduced for the first time on any service, in respect of the services already rendered on the dates prior to introduction of service tax, even if the payments are received on a subsequent date, no tax shall be leviable.

Similarly, we hold that in absence of specific provision, the rate of tax applicable to the service tax shall be the rate prevailing on the date of rendering the services. There are Supreme Court judgements as well which reaffirm this fundamental principle.

On the last point as to the applicability of the appropriate rate of service tax, it is again the position in law that changes in rates are undoubtedly effective prospectively.

In that case, a change in the rate would only be effective for the subsequent period and services rendered prior to the date of coming into force of the revised rate can only be charged to the erst-while rate of service tax and not the revised one. This is regardless of whether the change in rate was to increase it or to decrease it.

To reiterate therefore, changes in service tax rates are applicable prospectively and services rendered prior to the coming into force of the revised rates will continue to be charged to the erstwhile rates, notwithstanding that consideration for such services were charged and recovered subsequent thereto.

This problem of the effective date of coming into force of the various provisions in service tax law has been a recurring and vexing one and there is by now a plethora of case law in relation thereto. It is hoped that the department will see reason and not continue to litigate on these matters where the law is clear and has been consistently interpreted by the Tribunal in the correct manner.

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