posted 19 Sep 2012, 03:26 by CA Kunjan Shah
Advocates were resisting being brought within the ambit of Service Tax by their argument that their basic function is to assist the Court in effective justice delivery system and while doing so they function more like officers of the Court than as service provides. They were assisting the litigants in obtaining justice and that charging of fees was just ancillary to the main object. However, appreciating the popular sense they have agreed to be so covered by the Finance Act 2012, albeit in a restricted manner. 

The provisions for charging service tax on Advocates may be summarized as under: 

1) The services of Advocates are not covered in the Negative List. Such that their service would be taxable if otherwise not exempted or listed in the Exempt List. 

2) The Exempt List ( 25/2012 – ST dated 20/6/12), known as Mega Exemption deals with the service of Advocates at serial no. 6 as under 

6. Services provided by-
An arbitral tribunal to -

any person other than a business entity; or

a business entity with a turnover up to rupees ten lakhin the preceding financial year;
An  individual   as  an  advocate   or   partnership   fir of advocates by way of legal services TO-

an advocate or partnership firm of advocates providinglegal services ;

any person other than a business entity; or

a business entity with a turnover up to rupees ten lakhin the preceding financial year; or
A person  represente on an arbitral  tribunal  to an arbitraltribunal

3) In this article I propose to discuss services in clause 6(b) only. 

Services provided by An individual as an advocate or a partnership firm of advocates by way of legal services TO:
an advocate or partnership firm of advocates providing legalservices ; or
any person other than a business entity; or
a business entity with a turnover up to rupees ten lakh in thepreceding financial year; or
a business  entity  with a turnover  up exceeding  rupees  tenlakh in the preceding financial year.

Receiver of Service
Perso liabl topay service tax
(a)     An advocate  or partnershi firmof advocates providing legal services.
(b)     any person other than a businessentity
(c)     a business entity with a turnover up to rupees ten lakh in the precedingfinancial year
(d)     a business entity with a turnover exceeding rupees ten lakh in the preceding financial year.
Business Entity

  • a. For the purpose of analysis An advocate includes a partnership firm of advocates 
  • b. Business Entity means any Person ordinarily carrying out any activity relating to industry, commerce or any other business or profession and includes: 
    • (i)an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a society, (v) a limited liability partnership, (vi) a firm, (vii) an association of persons or body of individuals, whether incorporated or not, (viii) Government, ix) a local authority, or (x) every artificial juridical person, not falling within any of the preceding sub-clauses; 
  • c. Legal service means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority; 

1) The services shall be exempt only when the service provider, in the first instance, provides legal services irrespective of the status of the receiver of the service. For example If a practicing Individual Advocate named A provides legal services to another practicing Individual Advocate named B who uses such legal services in providing legal services to his clients then, the services provided by A will be exempt under clause (a) above. 

2) If B uses the input legal services not in providing further legal services but in providing some other services like imparting coaching to students of Law through conduct of coaching classes then such services –to this extent- will not be covered by clause (a) because the condition of providing legal services by B is violated. 

3) However even in the case situation (2), the service will still be exempt but under clause (b). If B imparts the coaching not on a regular basis and not restricted to a select group of registered students only, then he may not be treated as a Business Entity ordinarily carrying out any activity relating to industry, commerce or any other business or profession and thus exemption will be available. 

4) Moreover , in addition to his main profession of practice, if B also imparts the coaching on a regular basis such that his activities may be treated as an activity relating to industry, commerce or any other business or profession and if the value of his turnover in the preceding financial year was not more than Rs. 10 lakhs, then he will be treated as a Business Entity and the exemption will be available under clause(c) 

5) But in a case similar to case (4) above with the modification that the value of turnover of B in the preceding financial year was more than Rs. 10 lakhs, then the exemption will be lost under clause (d) above and B will have to pay service tax under reverse charge as a recipient of service. 

6) On the other hand If A-practicing individual advocate- provides Coaching 

Services to B-another individual advocate- who uses the coaching services in providing legal service , then such service shall not be covered by clause 6 of the Exempt list- not being legal services in the first instance and A will have to pay service tax under Direct Charge. 

7) If A provides legal service to one brother (X) in a suit filed against his another brother(Y) relating to the division of family property, then the full value of the service will be exempt under (b), because the service recipient X will not be treated as a Business Entity even if the turnover of X exceeded rupees ten lakh in the preceding financial year. 

8) However if X is running a small business of trading in miscellaneous items of food and had supplied certain items of food to Y-his own brother- on credit and Y now refuses to make payment for the supply and A-an Individual advocate- is advising X against Y for recovery of the business debts, then X becomes a Business entity and the status of services of A would be as under: 

If the turnove of X in the preceding  financial year was not exceeding  rupees ten lakh
If the turnove of X in the preceding  financialyear  exceede rupees ten lakh
Taxable-     service tax payable by X

9) The levy has been explained at serial no. 7.6.1 by Guidance Note: Taxation of Services: An Education Guide issued by the CBEC as under: 

  • 7.6.1 What is the tax liability of advocates, or arbitral tribunal in respect of services provided by them? 

Advocates can provide services either as individuals or as firms. Legal services provided by advocates or partnership firms of advocates are exempt from service tax when provided to the following: 

a) an advocate or partnership firm of advocates providing legal services 

(same class of persons) 

b) any person other than a business entity 

c) a business entity with a turnover up to rupees ten lakh in the preceding financial year However, in respect of services provided to business entities, with a turnover exceeding rupees ten lakh in the preceding financial year, tax is required to be paid on reverse charge by the business entities. 

10) The answer at (a) above “an advocate or partnership firm of advocates providing legal services (same class of persons)” creates confusion than provide clarification. 

a. What does the word “Class of persons” mean ?. Is it a group of identical entities ? If that be so, the following situations arise:

Service Provider
Service Receiver
(1) Individual
(2) Partnership Firm
(1) Individual
(2) Partnership

b. If it means a group of entities engaged in the same type of activity then the following situations arise:

Type of Activity of the Provider
Type of Activity of the Receiver
1)     Legal services
(2)      Other       thanlegal services
(1)      Legalservices
a. Exempt ithereceiver is Non Business Entity

b. Exempt if thereceiver is a businessentity with turnover less than rupees tenlakhs  in  the preceding financialyear.

c.   Taxable if thereceiver is a businessentity with turnovermore    than    rupeesten lakhs ithe preceding financialyear. Service tax will

b payable   b thereceiver.
(2)      Other     thanlegal services
Taxable-- servicetax payable btheProvider-- i.enotcovered by theExempt List
Taxable--servictax payable by the Provider--i.e. not covered by the Exempt List.

Certainly the classification given at (a) does not seem to be the intention of clarification. For all the practical purposes classification at (b) is the intention of the clarification. 

11) Applicability of SSI provisions to Legal services 

Service tax, like any other indirect tax, is a destination based consumption tax born the ultimate user and collected by the provider. The core of the system is section 66B which is the charging section levying service tax @ 12% on the value of all services, other than those services specified in the negative list which are provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. 

A reading of the above section makes it clear that the primary liability is on the person providing the service, though the same may be collected in a manner prescribed by the taxing authority. Section 68 prescribes the manner of collection of the tax. The manner of collection is as under: 

(a) Collected 100% from the Provider- Direct Charge 

(b) Collected 100% from the Receiver- Reverse Charges ( discussion follows) 

(c) Collected partially from both, the provider and the receiver, - Partial Reverse Charge-2012 

SSI exemption Notification No. 33/2012 - Service Tax dated the 20th June, 2012 if read, in the light of the above discussion would clarify the following: 

1) This notification exempts taxable services of aggregate value not exceeding Rs. 10 Lakhs in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act subject to conditions, inter alia as under: 

a) the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed ten lakh rupees in the preceding financial year. 

b) The notification does not apply to such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994.(Payment under Reverse Charge) 

c) Aggregate value means the sum total of value of taxable services charged in the first consecutive invoices issued or required to be issued, as the case may be, during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under section 66B of the said Finance Act or under any other notification. 

d) The provider of taxable service has the option not to avail the exemption contained in this notification and pay service tax on the taxable services provided by him. 

2) It is interesting to note that this notification does not apply to the cases in which service tax is payable under Reverse Charge mechanism i.e. section 68(2).But an exception has been carved out in case of Legal services covered by the Exempt List. Where Services are provided by an individual as an advocate or a partnership firm of advocates by way of legal services to a business entity with a turnover up to rupees ten lakh in the preceding financial year then service tax is not payable by any one. This means that the restriction in the SSI Notification 33/2012 on its applicability “to such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994” does not apply to legal services provided in this type of situation.(i.e. Payment under Reverse Charge) 

3) Now the question is : which notification overrides which , particularly when both the notifications are of the same date ? SSI notification 33/2012 excludes from within it coverage, the payment made under section 68(2) whereas Notification 25/2012 provides SSI exemption to a recipient of service, being a business entity with a turnover up to rupees ten lakhs in the preceding financial year though only in respect of Legal services. It is ,but an accepted legal principle, that when two or more notifications are in conflict, the notification which is more beneficial to the tax payer shall be applicable. Therefore notification 25/2012 shall override SSI notification 33/2012 to the extent of its non applicability to situations wherein the benefit is denied to the receiver making the payment of service tax u/s 68(2) in respect of legal services received. 

12) The business entity which pays service tax under this class i.e. Legal Services can, however, take input tax credit of such tax paid in terms of Cenvat Credit Rules, 2004, if otherwise eligible. 

13) The provisions relating to arbitral tribunal are also on similar lines. A person serving as a member of an arbitral tribunal comprising many arbitrators and receiving an amount from the arbitral tribunal then such service is exempt under sr. no. 6(c) of the mega notification. 

14) The above write up is the absolute personal opinion of the writer and does not amount to an expert legal opinion. It may or may not depict the legal position sought to be conveyed by the statute. Readers are cautioned to evaluate the actual legal position before acting on this write up. Further, this write up is meant only for an academic interest and not for any other purpose . 

Credit goes to  by: CA LALIT MUNOYAT ,.Com.(Hons.), CS, FCA, 9820193508 ,28th June 2012