Payment received during Transit period

There may be situations where a particular service becomes taxable during its performance. There are many service assignments which are performed over a period of time. In every budget, Central Government brings new services within the service tax net. It is a regular occurrence that during the initial period, the service is not taxable but before completion of the service it has become taxable. There may be two possible scenario regarding payment for the service, i.e. (i) Payment for the service is received after the subject service has become taxable, and (ii) payment has been received in advance for a service and during the performance of the service, it has become taxable wherein part of the service was provided to the client when it was not taxable. As per second proviso to Rule 6(1) of the Service Tax Rules, notwithstanding the time of receipt of payment towards the value of services, no service tax is 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. In other words, if the payment is for the service which became taxable during the performance of such service, tax is payable on pro-rata basis.

Therefore, in the first scenario, there is no ambiguity in law and a provision has been incorporated in the service Tax Rules that even if payment is received after service has become taxable, such service or part of such service cannot be taxed.

In the second scenario, position of law is not clear. As per Section 66 of the Finance Act, service tax is levied on the value of the taxable service at prescribed rate, whereas as per Section 68 thereof, service provider is required to pay service tax at the prescribed rate in prescribed manner. As per Rule 6 of the Service Tax Rules, payment of service tax is required to be made on the subsequent month on the basis of payment received during the month for the taxable service.

From the above, it appears service provider is required to pay service tax on the payments received for taxable services at the prescribed rate within stipulated time. Since the payment for service has been received in advance, no service tax has been paid thereon during the said period, as it was not a taxable service. As per Rule 4A of the Service Tax Rules, provider of a taxable service is required to issue Bill/Invoice/Challan within fourteen days from the date of completion of taxable service or receipt of any payment towards the value of taxable service, whichever is earlier.

In the present case, as payment has already been received, an event occurring earlier than completion of service, service provider is not required to issue any fresh Bill/Invoice/Challan for rendering service. Therefore, it appears that such advance receipts escape levy of service tax. However, that is not the case may be. The advance receipt for the services will be shown in the books of account as advance and will be adjusted in the books as and when the service is provided to the client. Such adjustments in the books of accounts have been considered as consideration for the service and therefore, it will be exigible to the service tax. Central Board of Excise and Customs (‘CBEC’) vide Circular No. 65/14/2003-S.T., dated 5 November 2003 has also clarified, although for a different logic, that where the value of taxable service has been received in advance for a service which became taxable subsequently, service tax has to be paid on the value of service attributable to the relevant month/quarter which may be worked out on pro rata basis. Relevant Para of the circular is reproduced below:

“As per the said circular, Rule 6 only prescribes the procedure of payment of tax. The liability to tax is created by Section 66 of the Finance Act, 1994. The liability to pay tax is fastened on the service provider by Section 68 of the said Act. These two sections read together imply that service tax is payable by the service provider on the value of taxable services. Thus if a service provided is taxable, tax has to be paid on its value. Section 67 also clarifies value of service as the amount charged for the taxable service by the service provider. In other words, an amount becomes value of taxable service only when it has a nexus with the service provided. That is the reason why the expression used in Rule 6 is “value of taxable services” and not amount. The implication is that the tax has to be paid on the value of taxable services attributable to the service provided in a month/quarter as and when it is received. Thus, Rule 6(1) cannot be read in isolation.”

In this context, it is interesting to note that maintenance and repair of goods and equipment service was brought within service tax in the year 2003 from 1 July 2003. Government vide Notification No. 11/2003 dated 20 June 2003 exempted service tax on maintenance and repair on the payment received prior to 1 July 2003 provided the bill or invoice for the said portion of taxable services was also raised prior to the 1 July 2003. CBEC vide circular No. 59/8/2003 dated 20 June 2003 clarified that similar will be the situation for payments made for continuing service. In other words, if the payment has been received in before 1 July 2003 but service is continuing even after 1 July 2003, after it has become taxable, no service tax is leviable.

If the similar logic is taken in respect of other service, it will appear that in case of continuing service where bill is raised and payment is received in advance, no tax is leviable on the services which subsequently become taxable. However, CBEC vide Circular No. 65/14/2003-S.T., dated 5 November 2003 has clarified that:

“Circular No. 59/8/2003, dated 20-6-2003 [2003 (155) E.L.T. T7] wherein it was clarified that in view of the Notification 11/2003-S.T., dated 20-6-2003, no service tax would be payable where maintenance contracts are entered into before 1-7-2003, provided the invoices are raised and paid prior to 1-7-2003. It was further mentioned in the circular that similar would be the situation in case of continuing services. By continuing services what was meant was continuing maintenance services where there is an ongoing contract under which regular periodical payments are made. That Para 2.3.1 was only in the context of maintenance and repair service is also quite clear from the heading, “MAINTENANCE AND REPAIR SERVICES” of Para 2.3 in that circular. No similar exemption has been granted to any other service in case of advance payments.”

It is an open question as to whether the Board can issue contrary clarifications with respect to assessment practice wherein different assessees are placed in similar situation but the liability is different.