Pranab Mukherjee could dare to do, though in a guarded scope, what P.Chidambaram did not (not that he could not do but willingness to practice equity was missing). For the first time in last 15 years since the inception of service tax in India, levy of service tax has been imposed in a limited way on legal services (profession) by Finance Bill, 2009. While we do not know the reactions of former Finance Minister, who being a lawyer himself kept his own professional services out service tax net, though certain similar services being rendered by other professionals (eg, CA, CS, ICWA, consultants) were under service tax net, it must be an embarrassing moment for him
It is rather surprising to see as to how easily we shift our stand as the same set of tax officials would have advocated before former Finance Minister that there is no logic to levy service tax on legal services and now they have put forth the idea of or have convinced the Finance Minister that service tax on legal services is justified. Finance Bill, 2009 seeks to put the legal fraternity on the same footing as of chartered accountants, cost accountants, company secretaries, engineering and management consultants. As a first step, this levy is proposed to a select class of legal professionals for services rendered or to be rendered by them.
The Finance Minister made the following statement in Parliament in his budget speech -
"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".
The most important expression in the levy of service tax on legal services is 'business entity'. The service tax shall be levied if the service provider and service receiver, both are business entities. Though ' business entity ' has not been defined, let us understand, what is conveyed by 'business' and 'entity'
Oxford's English Dictionary provides 'business' the following meanings —
— A person's regular occupation, profession or trade
— An activity that some one is engaged in
— Works that have to be done or matters that have to be attended to
— The practice of making one's living by engaging in commerce.
— Operating, especially in commerce.
The term 'business' is very common and popular in usage. The derived terms of business are also used comely such as business cards, business cycle, business day, business hours, business like, businessman, business person, business process, business studies etc.
In Income Tax, 'business' has been defined to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
In Partnership Act, 'business' means to include every trade, occupation and profession.
According to Halsbury (4th edition, Vol. 27), the word 'business' extends the covenant to all cases where work, involving the recourse of numerous persons to the premises, is done for payment, or even without payment where the result is in effect the same as if a charge were made. The making of profit is not essential to constitute a business; nor, on the other hand, does payment necessarily constitute one.
Supreme Court has interpreted 'business' as follows in various decided cases -
— Business connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose." [Narain Swadeshi Mills v. Commissioner of Excess Profits Tax, AIR 1955 SC 176].
— The 'business' referred to is commercial business. The Government is engaged in huge commercial projects and so far as such activities are concerned (e.g. transport by land, air or sea) it cannot be said that the Government is not carrying on business. In its commercial ventures, the Government is entering into contracts with citizens. These contracts are governed by the ordinary law of the land.
— The word business is of large signification, and in its broadest sense includes nearly all the affairs in which either an individual or a corporation can be actors.
— The word 'business' has been held to denote an activity with the object of earning profit. The business of a tea-grower and manufacturer is not merely to grow tea-plants but to collect tea-leaves and render them fit for sale. The tending of tea-garden to preserve the plants cannot be described as a continuation of the business. [Senairam Doongarmall v. Commissioner of Income Tax, AIR 1961 SC 1579, 1581].
— A single transaction does not constitute business. The concept of business postulates continuity of transactions. [Manipur Administration v. Nila Chandra Singh, AIR 1964 SC 153]
— Business includes:
(a) day-to-day running of the business,
(b) rationalization of business administration and modernization of machinery of business,
(c) preservation of business and protection of its assets and property from expropriation, coercive process or assertion of hostile title,
(d) payment of statutory dues and taxes imposed as pre-condition for commencement or carriage of business,
(e) things incidental to carriage of business. [Birla Cotton Spng. & Wvg. Mills Ltd v. CfT, (1967) 64 ITR 568,584 (Cal), affirmed, 2008 -TMI - 6261 - SUPREME Court]
— The word 'business' connotes some real, Substantial and systematic or organised course of activity or conduct with a set purpose. [Narain Swadeshi Wvg. Mills v. Commr. of Excess Profits Tax, AIR 1958 se 861 as cited in CBI v. V C. Shukla, (1998) 3 see 410, para 27].
— 'Business' is a wider term than 'trade' and is not synonymous with it, and means almost anything; which is an occupation as distinguished from a pleasure. However, the term must be construed according to its context. [Words and Phrases BUTTERWORTHS, 3rd Edn. 47 Halsbury's Laws, 4th Edn., para 2 as cited in B.R. Enterprises v. State of U.P., (1999) 9 see 700, para 71 : AIR 1999 SC 1867].
— In a broad sense it is taken to mean, 'everything that occupies the time, attention and labour of men for the purpose of livelihood or profit. Practice of law is business. [S. Mohan Lal v. R. Kondiah, AIR 1979 SC]
— Business has a very wide import. In its generic sense, is any purposeful activity any activity, directed towards some end, an activity engaged in as normal, logical, or inevitable and usually extending over a period of time. In its narrow sense, it is confined to activity of a commercial nature with a profit motivation. [Bakhtawar Singh Balakrishnan, New Delhiv. Union of India, AIR 1983 Del 201, 204. [CPC (5 of 1908), S. 20]]
— "The word 'business' applies to an occupation of mercantile or commercial nature. The physical involvement for carrying on business or trade is not necessary. The impression that the respondent should have skill or capability to do the business of tailoring herself is wholly misplaced. The word 'business' by itself is very comprehensive and it may at some time include carrying on of a business through employees. [Sher Ahmad Jan v. Zubeda Nasreen, 1989 CLC 1113 (Pak.) (Legal Terms & Phrases — Ilyas Khan)].
Literally, 'entity' is a thing with distinct and independent existence. P Ramanatha Aiyar in Advanced Law Lexicon, 2005ed provides the following meanings of 'entity'-
" A real being existence. An organization or being that possesses separate existence for tax purposes. Examples would be corporation, partnerships, estates and trusts. The accounting entity for which accounting statements are prepared may not be the same as the entity defined by law.
Entity includes corporation and foreign corporation not for profit corporation profit and not for profit unincorporated association business trust , estate, partnership, trust, and two or more persons having a joint or common economic interest, and state, United States, and foreign government".
So far as service tax is concerned, the expression, 'business entity' has been used for the first time for proposed legal services. The terms used in other definitions are either any person, commercial concern or business establishment.
In relation to management consultants, law practitioners and tax consultants (including ESI, PF and other industrial law practitioners) do not provide any service relating to management of organisation and hence they are not covered as per Letter No. F. No. 341/21/99-TRU, dated 20-8-1999. CST, Delhi has also clarified by way of press release dated 26.11.2007 that the service provided by the lawyers in their professional capacity are not subjected to service tax.
In relation to business support services, In may be noted that the services provided by the lawyers in their professional capacity are not subject to service tax. A press release dated 26.11.2007 issued by New Delhi Service Tax Commissionerate has clarified that outsourcing of legal work to an associate by a law firm can not be categorized under business support service. It states that "As regards services provided by lawyers in their professional capacity relating to law, the Finance Minister has already made the position clear on the floor of Parliament. It is also pertinent to note that the Empowered Committee of State Finance Ministers has included Legal Service in the list of services which are not presently taxed. This has been accepted in principle."
The proposed levy on Legal Services
In his budget speech, the Finance Minister correlated the services provided by legal consultants with service provided by other professionals such as chartered accountants , company secretaries , cost accountants, consulting engineers and management consultants. He also said that service tax would not be applicable in case service provider or service receiver is an individual and that service tax shall be levied only on advice, consultancy or technical assistance in the filed of law.
It is proposed to levy service tax on legal services under new clause (zzzm) of section 65(105) of Finance Act, 1994 from the date of be notified after enactment of the Finance Bill, 2009.
Clause (zzzzm) reads as under-
"Taxable service means any service provided or to be provided (zzzzm) 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".
Going by the aforesaid definition, following the essential ingredients for taxability of legal services-
- Levy of service tax is on legal consultants being a business entity.
- Service provider as well as service receiver, both must be business entities. (ie, if any one or both are not business entities, service tax will not be leviable).
- Services provided should be in relation to any advice, consultancy or assistance in any branch of law.
- Service may be provided in any manner.
The words and expression 'any branch of law' and ' in any manner' make the scope of legal services very vide. All type of laws- civil, criminal, political, economic, taxation , IPR related, international laws, WTO/ ant idumping related laws, arbitration and reconciliation laws etc. Not only this, such services could be provided in any manner, directly or indirectly, by electronic or any other mode and form
What is Excluded
The definition of taxable service itself excludes the following from the service tax net-
(a) Services provided by individuals or non business entities.
(b) Services received by an individual or non business entities.
(c) Services provided by way of any of appearance before any court, tribunal or authority
(d) Other services not covered under legal services such as business support service, consulting engineering service, management consultancy service or services falling under the ambit of other specified services.
(e) Services provided by lawyers, advocates and solicitors under a business entity which is neither an advice/ consultancy nor assistance (such as a mere expression of opinion)
It is not necessary that business entity should comprise of advocates, lawyers or solicitors. A business entity may or may not have such professionals. This is not being envisaged in law and what is relevant is that such entity should provide legal services. Even a firm of accountants or management consultants can provide legal services.
In one of the clarifications (Order No 1/1/2002- ST dated 26.2.2002 issued by CBEC), it was clarified that 'an advice is generally understood to optional in nature and has no statutory force . It is upto the client to accept the advice or not……………. assistance is normally for the purpose of achieving a particular aim or object.
Who is to Pay Tax
It is not that all legal service providers have to pay service tax. Only those who are rendering taxable services as business entity shall be liable to pay service tax. The explanation to definition provides that business entity will include any association of persons, body of individuals, company or firm but shall not include an individual. Though not specifically mentioned, Limited Liability Partnerships (LLPs) shall be covered, so also the proprietorship firms. While an individual has been specifically excluded, proprietorships have not been excluded. There are number of decided cases in service tax where it has been held that individual and sole proprietorship firms are not the same and proprietorship firms have been held as commercial concerns. In this case, what is more important is that the service provider should be a business entity. It implies that a non -business entity, say, a charitable trust or a non government organization or cooperative society without any business motive , if providing legal services, will not attract service tax. If any government department provides such service, no service tax shall be attracted.
One of the exclusions provide that appearance before any court, tribunal or authority shall not be a taxable service. It implies that the core legal services which may be provided for representing the client before any such bodies shall not be taxable. Courts would cover all India and foreign courts including special courts and all tribunals shall also be covered (eg, ITAT, CESTAT, CLB, SAT, etc). Appearance before statutory authorities such as CBDT, CBEC, SEBI, Competition Commission of India, Authority for Advance Rulings etc shall also be excluded . Authority does not necessarily mean AAR alone. Representations or appearance should, therefore be statutorily allowed to be so under the respective legislation. Similar provisions exist for chartered accountants, cost accountants and company secretaries. However, in case of CA/CS/ CWA, it is also mentioned such representation before any statutory authority shall be in course of proceedings initiated under any law for the time being is force . In case of legal services, all appearances are excluded, whether arising out of any notice or otherwise. For example, advocates engaged for representing clients (say, dispute between two persons or a husband and wife) shall not be liable to pay service tax on such appearance.
Based on the definition and my limited understanding , it is felt that taxability or otherwise of certain services which legal consultants provide may or may not attract service tax as follows-
Type of Services Taxability
- Conference with clients/ advocates taxable
- Briefing to senior counsels taxable
- Expressions of opinion non taxable
- Legal interpretation without any advice non taxable
- Legal drafting (agreements, writs, taxable
contracts, letters, MOUs etc)
- Vetting of documents taxable
- Search / title reports taxable
- Certification as required under any statute non taxable
- Recovery agent's services non taxable
(taxed under different category)
- Arbitration under court orders non taxable
Despite the proposed provision with proviso and explanation, following grey areas shall have to be addressed by the government-
(a) The scope of business entity itself will create litigation vis-à-vis commercial concern.
(b) Whether law firms be considered as business entities or professional firms will create confusion/ subject to litigation .
(c) A firm of lawyers is a professional firm or a business entity will be challenged as lawyers/ solicitors/ advocates are professionals and not businessmen (our constitution considers business, profession, callings and employment differently ).
(d) Challenge will also be on the ground that as professionals, such service providers are paying Professional tax to state government and though professional tax and service tax are mutually exclusive, business, and profession may net be treated as same.
(e) Taxability of services provided in India to foreign clients and to Indian clients in foreign countries, categorization of export and import and classification of certain services which are subject to different interpretation ought to be addressed.
(f) What should a LLP comprising of an advocate, chartered accountant and management consultant, will create confusion and department may like to tax them as management consultancy and not legal consultancy.
Though the resistance to proposed levy of service tax on legal services is a natural human reaction, one needs to take a out of box view and look at a larger picture. Ideally such services should have been placed at par with other similar services much earlier to provide a level playing field , yet, a modest beginning has now been made and should be accepted by one and all. After all, it is an indirect tax and larger participation is required for our country's GDP growth. Needless to mention, legal services like medical services and other services are very important for country and country men, yet, based on socio- economic policies, the service tax has been imposed on legal services, though in a very limited way.
It is only hoped that levy should be taken in right spirit and as an opportunity to warm up for GST next year when it will be applicable in a much wider manner.
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By: Dr. Sanjiv Agarwal - July 9, 2009
Discussions to this article
This is a comprehensive write u[p but CBEC will have to clarify many issues relating to taxability such as advice and assistance are verywide terms.