POINT OF TAXATION-RULE 4 VS SECTION 67A

POINT OF TAXATION-RULE 4 VS SECTION 67A

An Article By:-
CA PRADEEP JAIN
CA NEETU SUKHWANI

Introduction:-This article is an attempt to analyse the provisions contained in Rule 4 of the Point of Taxation Rules, 2011 in case when there is change in effective rate of service tax. As the increased rate of service tax has been implemented from 12.36%(including Education Cess & SHE Cess) to 14% (with exemption from Education Cess & SHE Cess), with effect from 01.06.2015, the question as regards point of taxation as per Rule 4 has haunted the minds of service tax assessees. The fear of entangling themselves in dispute has lead the service tax assessees charging enhanced rate of service tax @14% even prior to its implementation date, i.e., 01.06.2015 and irrespective of the provisions contained in the statute. However, what rate of service tax is to be applied in different situations is the question that needs to be resolved properly after analysing the provisions of the statue read with Rules made thereunder. The authors endeavour to seek answer to the question of service tax rate applicable in different situations. At the outset, it would be better to discuss the provisions of Rule 4 of the Point of Taxation Rules, 2011 and the section 67A of the Finance Act.

Rule 4 of Point of Taxation Rules, 2011:-

If the above pictorial chart is analysed carefully, it is found that in nutshell, as per Rule 4 of the Point of Taxation Rules, 2011, the occurrence of any two events out of three events will determine the rate of service tax. The three events are date of provision of service, date of issue of invoice and date of receipt of payment for the service. Whenever any two out of the above cited three events occur, the rate of service tax applicable on the occurrence of the said events will be relevant.

Section 67A of the Finance Act:- Date of determination of rate of tax, value of taxable service and rate of exchange

The rate of service tax, value of taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Analysis of the provisions:-If we analyse the rate of service tax determined as per the Rule 4 of the Point of Taxation Rules, 2011 and that as per section 67A of the Finance Act, the following are the results that are derived:-

SITUATION	RATE AS PER POT	RATE AS PER SEC 67A	REMARKS
1(a)	14%	12.36%	MISMATCH BETWEEN RULE AND SECTION
1(b)	12.36%	12.36%	HARMONISATION BETWEEN RULE AND SECTION
1(c)	12.36%	12.36%	HARMONISATION BETWEEN RULE AND SECTION
2(a)	12.36%	14%	MISMATCH BETWEEN RULE AND SECTION
2(b)	14%	14%	HARMONISATION BETWEEN RULE AND SECTION
2(c)	14%	14%	HARMONISATION BETWEEN RULE AND SECTION

On pursuing the above table, it is found that there is mismatch in the outcome of the rate of service tax in situations 1(a) and 2(a) and so there is ambiguity as regards the rate of service tax to be applied in both the situations.
It is worthwhile to mention here that the Hon’ble Supreme Court has held in the case of ITW SIGNODE INDIA LTD. VERSUS COLLECTOR OF CENTRAL EXCISE [2003 (158) E.L.T. 403 (S.C.)]that delegated legislation must be read in the context of primary legislative Act and not the vice versa. Consequently, in case of conflict between the provisions of Act and Rules, the provisions contained in the Act will prevail and will have precedence over the provisions contained in the Rules.
Similarly, it was held by Hon’ble Bombay High Court in the case of COMMISSIONER OF C. EX., MUMBAI-II VERSUS STANDARD DRUM & BARREL MFG. CO. [2006 (199) E.L.T. 590 (Bom.)] that :-
Interpretation of statute - Central Excise Rules to be read in light of Central Excise Act and in case of conflict between Act and Rules, Act shall prevail. [para 24]
In light of the above cited decisions, it is settled fact that in case of conflict in the provisions of Rules and Sections, the provisions of section will prevail. Consequently, we may conclude that in case of situation 1(a), the rate of service tax will be 12.36% and in case of situation 2(a), the rate of service tax will be 14%. However, this analogy cannot be concluded as final because of the litigation prone nature of the revenue department. Consequently, the assessees with low risk taking capacity will chose to pay service tax at higher rate in either of the situation so that they are not fastened with interest and penalties in future. This is for the reason that service tax is a consumption based tax, the ultimate burden of which is to be borne by the service recipient. As such, paying service tax at higher rate will rule out the possibility of future disputes with the revenue department.

Backdrop of provisions contained in positive list tax regime:-It is further submitted that even if the provision contained in the positive list tax regime is pursued, it is found that in case of change in service tax rate, the rate of service tax applicable on the date of provision of service was relevant. There have been number of decisions pertaining to period prior to negative list era wherein it has been concluded that the rate of service tax to be made applicable is the rate prevalent on the date of provision of service. It is worth noting that the Apex Court in the case of ASSOCIATION OF LEASING & FINANCIAL SERVICE COMPANIES VERSUS UNION OF INDIA [2010 (20) S.T.R. 417 (S.C.)] concluded that rendition of service is the taxable event for service tax and consequently, the rate of service tax applicable on the date of provision of service will be relevant. Similar decisions were given by the following judicial forums:-
·        VISTAR CONSTRUCTION (P) LTD. VERSUS UNION OF INDIA [2013 (31) S.T.R. 129 (Del.)]
·        COMMR. OF SERVICE TAX VERSUS CONSULTING ENGINEERING SERVICES (I) P. LTD. [2013 (30) S.T.R. 586 (Del.)]
·        COMMISSIONER OF C. EX. & CUS. VERSUS RELIANCE INDUSTRIES LTD. [2010 (19) S.T.R. 807 (Guj.)]
·        COMMR. OF SERVICE TAX, NEW DELHI VERSUS LEA ASSOCIATES SOUTH ASIA P. LTD. [2014 (36) S.T.R. 909 (Tri. – Del.)]
In light of the above cited decisions rendered in the positive list tax regime, and observing the provisions of section 67A, one may strongly believe that in case of change in rate of service tax, the date of provision of service is the relevant factor. The above cited decisions also strengthen the statutory provisions contained in section 67A. However, applicability of provisions of section 67A would render a certain portion of the Rule 4 of the Point of Taxation Rules covering situation 1(a) and 2(a) as otiose which is also not proper.

Before Parting:-There exists ambiguity as regards application of the rate of service tax because in the cases covered by situation 1(a) and 2(a), the provisions contained in the Rule 4 of the Point of Taxation Rules, 2011 and section 67A are contradictory. However, the assessees prone to minimum risk opt for paying service tax at higher rate because the ultimate burden to pay service tax is on the service recipient and if the service tax amount is charged lesser than required, then the same will be required to be paid from pocket. The author also highlights that it is not that there is ambiguity as regards rate of service tax in case of Rule 4 of the Point of Taxation Rules, 2011. Rather, there exists ambiguity even for Rule 7 of the Point of Taxation Rules, 2011 meant for service recipients liable to pay service tax under reverse charge mechanism. As per Rule 7, the Point of taxation for service recipients liable to pay service tax under reverse charge mechanism is the date on which payment is being made. Consequently, in case of partial reverse charge, say for example in case of works contact service, where 50% service tax liability is to be discharged by the service provider and 50% by the service recipient, the point of taxation for service recipient will be covered by provisions of Rule 7 (for the reason that Rule 7 is Notwithstanding anything contained in Rule 3, 4 or 8) while that for service provider will be governed by Rule 4 because it is the case for change in rate of service tax. However, this has lead to absurd situation because it leads to different rate for service recipient and different rate for service provider for the same service. For example, if A agrees to provide works contract service to B on 5.6.2015 whereas B makes payment of service to A on 29.05.2015, then in such a situation, for B, the provisions of Rule 7 will be applicable as B is service receiver liable to pay 50% service tax under reverse charge mechanism. Consequently, B will pay 50% service tax at the rate of 12.36% on the value of service because point of taxation for B will be date of payment. However, for A, the provisions of Rule 4 will be applicable as this is the case of change in rate of service tax and provisions of Rule 3 will not have any relevance because Rule 4 begins with non-obstante clause and overrides provisions contained in Rule 3. Consequently, for A, the point of taxation will be date of issue of invoice as covered by situation 2(b) as in the above pictorial chart and hence, the rate of service tax applicable for A will be 14%. This example reflects the absurdity wherein service receiver is liable to pay service tax at the rate of 12.36% whereas service provider is liable to pay service tax at the rate of 14% for the same service due to inconsistency in the provisions contained in the Rules. Moreover, even if the as per Point of Taxation Rules, service receiver is liable to pay service tax at the rate of 12.36%, the revenue department will object the same by referring the provisions of section 67A of the Finance Act wherein the rate of service tax is determined by the date of provision of service. Moreover, if the service provider is paying service tax on receipt basis having total turnover in the last year less than Rs. 50 lakhs, then in that situation, whether the service provider will be required to pay service tax at the rate of 12.36% on receipt of payment for service or as per the provision contained in Rule 4 of the Point of Taxation Rules, 2011? Well, the hapeless service tax assessees have no option but to either bear the burden of increased service tax rate to avoid litigation or to fight the battle till the tribunal!!! Lets hope that the Board comes up with clarification in this regard soon…….

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POINT OF TAXATION-RULE 4 VS SECTION 67A

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