Legal consultancy services

    Service tax has been introduced on Legal Consultancy Services, through an amendment by Finance Act, 2009. The levy has been notified w.e.f. 1-9-2009. Hence, Service tax would be payable on Services provided on or after 1-9-2009.

2. Statutory provisions :

    The relevant extracts from the Finance Act; 1994, as amended (‘Act’) are reproduced hereafter for ready reference :

     S. 65(105) (zzzzm) of the Act :

    Taxable service means any service provided or to be provided :

    To a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner :

    Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.

    Explanation — For the purposes of this sub-clause, ‘business entity’ includes an association of persons, body of individuals, company or firm, but does not include an individual;

3. Scope of services :

    (a) The scope of services liable to Service tax, as explained through Dept. Circular [DOF No. 334/B/2009 — TRU dated 6-7-2009], is as under :

    Para 2.3

    As in the case of management consultancy or engineering consultancy service, any consultancy, advice or technical assistance provided in any discipline of law is proposed to be subjected to service tax. However, the tax would be limited to services provided by a business entity to another business entity. It has been defined that a business entity includes firms, associates, enterprises, companies, etc. but does not include an individual. Thus, services provided by an individual advocate either to an individual or even to a business entity would be outside the scope of the taxable service. Similarly, the services provided by a corporate legal firm to an individual would also be outside the purview of taxable service. Any service of appearance before any court of law or any statutory authority would also be kept outside this levy.

    (b) In all Other Taxable Services, even an Individual Service Provider is liable to Service tax. However that is not the case in respect of Legal Consultants.

    (c) For levy of Service tax under the head Legal Consultancy Services, there is no requirement that the ‘legal entity’ should be a member of the Bar Council of the respective state or any such body. Thus even a Sales Tax Practitioner/Income Tax Practitioner rendering services as a ‘business entity’, other than those providing services in their individual capacity, are required to pay Service tax. For that matter even retired officers of the Department providing services in the areas of Central Excise, Customs, Service tax etc. as a group would be covered. Thus, the Scope of Service is very wide so as to include large variety of Consultants including Document Writers, Marriage Counsellors, Passport and Visa Consultants, etc.

4. Levy is discriminatory :

    In his Budget Speech for the year 2009-10, the Finance Minister explained the scope of the proposed levy in the following manner :

    “As the hon’ble Members are aware, services provided by Chartered Accountants, Cost Accountants and Company Secretaries as well as by engineering and management consultants are presently charged to Service Tax. Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree ! As such, I propose to extend Service Tax on advice, consultancy or technical assistance provided in the field of law. This tax would not be applicable in case the service provider or the service receiver is an individual.”

    As stated earlier, a very pertinent aspect of the levy of Legal Consultancy Services is that, Service Providers rendering services in their individual capacity are kept out of the levy. There is no convincing reasoning given for the same by the Govt.

    In this regard, it needs to be noted that, various professional service providers (an illustrative list given hereafter) are liable to Service tax irrespective of the status of the Service Provider

It would appear that, exclusion of individuals from the ambit of Legal Consultancy Services liable to Service tax, is discriminatory vis a vis Other Professional Service Providers. The same needs to be speedily addressed by the Govt.

S. Some issues:

S.l LAW 1 is a partnership firm of advocates & solicitors practising in the areas of litigations as well as consultations. As at 1-9-2009, LAW1 has out-standing advances to the tune of Rs.S crores which could be for the following services:

    a) Taxable  services

    b) Exempt

    c) Out  of pocket  reimbursements

Law 1 wants to know its Service tax obligations and time limit within which Service tax liability is to be discharged by them in regard to the advances out-standing as at 1-9-2009.

5.1A Though service tax payment to government is linked to receipt of consideration for services (either actual or advance), taxable event for levy of Service Tax, is ‘provision of or rendering Service’ and not ‘Receipt of Consideration’. Hence, it would reasonably appear that, LA W1 would be liable to Service Tax on advances received prior to 1-9-2009 for Tax-able Services provided on or after 1-9-2009.

In this regard, it would become essential for LAW1, to identify outstanding advances vis-a-vis taxable services/exempt services and out of pocket expenses.

This position is impliedly made clear under Rule 6(1) of Service Tax Rules, relevant extracts of which are reproduced hereafter:

Rule 6(1) – Payment of Service Tax

The service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the calendar month in which the payment are received, towards the value of taxable services :

Provided that where the assessee is an individual or proprietary firm or partnership firm, the service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the quarter in which the payments are received, towards the value of taxable services:

Provided further that notwithstanding the time of receipt of payment towards the value of services, no service tax shall be payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable:

Provided also that the service tax on the value of taxable service received during the month of March, or the quarter ending in March, as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year.

Explanation – For the removal of doubt it is hereby clarified that in case the value of taxable service is received before providing the said service, service tax shall be paid on the value of service attributable to the relevant month, or quarter, as the case may be.

It is felt that, if conditions under ten lakh exemption notification are satisfied, the LAWl can avail Exemption upto 10 lakhs for the period 1-9-2009 to 31-3-2010.

Service Tax liability would have to be discharged by LAWl in regard to Outstanding Advances which are attributable to taxable services by 5th October, 2009.

5.2 MR SMART is an individual lawyer practising in the Sole Proprietorship firm name of ‘SMART SOLUTIONS’. Due to conflicting views being expressed by professionals, MR SMART is confused as to whether or not he is liable to Service tax under legal consultancy services. Kindly advise MR SMART.

5.2A The Explanation to S. 65(105)(zzzzm) of the Act reads  as under  :

For the purpose of this sub-clause, ‘business entity’ includes an association of persons, body of individuals, company or firm, but does not include an individual.

It is a reasonably settled position that a proprietory concern is only a business name in which a proprietor carries on his business. It has no independent legal status.

In this regard useful reference can be made to Ashok Transport Agency v. Awadhesh Kumar, (1998) 5 SCC 567 & SK Real Estates v. Ahmed Meeran, (2002) 111 Comp Cases 400 (Mad.).

Hence, it would appear that, MR SMART would be excluded from the ambit of Legal Consultancy Services introduced w.e.f. 1-9-2009.

However, it is possible that, service tax authorities could adopt a view that a firm as a business entity would include a proprietary concern. It is felt that, CBEC should issue appropriate clarifications to avoid litigations.

5.3 The proviso to S. 65(105)(zzzzm) of the Act, reads as under:

“Service providing by way of appearance before Court, Tribunal or other Authority shall not amount to taxable Service.

It is very common that several services related to appearances are also provided by lawyers like drafting of replies to notices, drafting of appeals and stay petitions, compilation of submissions, etc.

Whether services related to appearances would be excluded from the ambit of legal consultancy services liable to service tax.

5.3A It needs to be expressly noted that the exemption granted in regard to legal consultancy services is differently worded as compared to exemption to practising CA.

Exemption granted to practising CAs and others in terms of Notification No. 25 /06-ST dated 13-7-2006 reads as under :

Services provided or to be provided in professional capacity, to a client, relating to representing the client before any statutory authority in the course of proceedings initiated under any law for the time being in force, by way of issue of notice ..

Further, appearance before the statutory authorities in respect of practising chartered accountants, cost accountants and company secretaries is exempt, but exemption is available only if such appearance is in pursuance to a notice. In the case of legal consultancy services, such services are exempt even if appearance is not in pursuance to a notice.

On a plain reading of proviso to S. 65(105)(zzzzm) stated above, it appears that, services related to appearances before Court/Tribunal/etc. like drafting, consultations, study & research, etc. may strictly not be regarded as exempt service. The terminology ‘in or in relation to’ extensively employed in the Finance Act, 1994 is not found in the proviso to S. 65(105)(zzzzm) of the Act.