The Jharkhand High Court on Thursday quashed a formal notice issued by the tax authorities to a senior lawyer demanding payment of tax on legal services provided by him to a law firm. The bench of Chief Justice Ravi Ranjan and Justice Sujit Narayan Prasad, however, did not allow the motion to quash Notice No. 18/2016-ST dated 1.3.2016 and Notice No. 9/2016-ST …
The High Court of Jharkhand on Thursday rescinded a formal notice issued by tax authorities to a senior attorney requesting payment of service tax on legal services provided by him to a law firm.
The bench of Chief Justice Ravi Ranjan and Justice Sujit Narayan Prasadhowever, did not allow prayer seeking to nullify Notification No. 18/2016-ST of 1.3.2016 and Notification No. 9/2016-ST of 1.3.2016 issued by the tax authorities insofar as it sought to recover service tax directly from senior counsel for the legal services they provided.
The case in brief
The bench essentially dealt with the plea of a brief Senior Advocate Madhu Sudan Mittal who challenged a demand letter served on him to recover service tax directly from him for legal services he rendered to a lawyer/firm, treating their relationship as that of a client and a lawyer.
He claimed that the Central Government, in the exercise of the power conferred upon it by Section 93(1) of the Finance Act 1994, issued Notification No. 25/2012 dated 20.06.2012 exempting certain services within the scope of Article 66B of the Finance Act 1994 (relating to the collection of tax on services).
It has been argued that legal services provided by one lawyer/law firm to another lawyer/law firm, to anyone other than a business entity or a business entity whose turnover does not exceed 10 000 rupees in the previous year should be exempted from the scope of the service tax.
However, it was further argued that the defendants, in an attempt to arbitrarily alter the existing mechanism, had amended the aforementioned notices void (i) Notification n°18/2016-ST of 01.03.2016 (first notification of modification of the RCM) who modified the Mega RCM notification and (ii) Notification n°9/2016-ST of 01.03.2016 (first notification of modification of exemption) who modified the Mega Exemption Notification.
Therefore, with respect to the first notification of modification of the MCR, the services provided by a lead lawyer would have been outside the scope of the Mega RCM notification. This notification entered into force on 01.04.2016.
The First notification of modification of exemption, notification n° 9/2016-ST of 01.03.2016, limited the exemption granted to services provided by senior counsel. Said notice contemplated the relationship between a senior lawyer and a lawyer/firm as that of a client and a lawyer. These notifications were challenged on this ground alone.
Initially, the Court observed that if an amendment is made by way of substitution, it will relate to the original document and therefore the Court had to decide whether the amendments that were made under Notification No. 18/2016 -ST of 01.03.2016 and Notification n°34/2016-ST of 06.06.2016 are by way of substitution and if so, what would be the consequence?
The Court noted that the provision contained in Notification No. 30/2012 of 20.06.2012 was amended by virtue of Notification No. 18/2016-ST of 01.03.2016 by way of substitution and subsequently, said notification was changed again. as a replacement see Notification n°34/2016-ST of 06.06.2016.
In this context, considering that the two amendments are by way of substitution and that the amendment by way of substitution refers to the original document, the Court made the following observation:
“…the two amendments by substitution of the provision contained in the original notification will be deemed applicable from the date of notification of 20.06.2012. Since both amendments refer to the original document, in our considered view, the formal notice issued by the relevant authority for the payment of service tax on legal services provided by a senior lawyer for the period of 01.04.2016 to 05.06.2016 is deemed not viable in the eyes of the law.”
Case title – Madhu Sudan Mittal c. Indian Union and others
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