The Hindu Business Line : A matter of construction

THE legendary Art Buchwald once said "Tax reform is taking the taxes off things that have been taxed in the past and putting taxes on things that haven't been taxed before."

We haven't had an opportunity to have tax reform as a project as far as service tax is concerned due to the simple fact that save for a couple of minor noises, the tax has been accepted albeit with reluctance in India.

Service tax has become a law in itself with a catena of notifications, circulars and the omnipresent case laws. An interesting case came up before the Commissioner (Appeals) in the Sthapatya Rachana (2005 184 ELT 334) case.

An architect by profession, the proprietor of this firm apparently obtained a one-off contract to value an immovable property.

The Deputy Commissioner of Service Tax in Vadodara opined that he was liable to service tax on this transaction as a consulting engineer. The architect argued that he was only an architect and not a consulting engineer and, hence, was not liable to pay service tax on this transaction.

The Deputy Commissioner was not convinced and demanded service tax along with an equivalent penalty which forced the architect to take the case to the Commissioner (Appeals).

His argument there was that there was letter No 350/128/97-TRU which explained the matter in no uncertain terms stating that an architect could not be considered a consulting engineer. To add a finishing touch to his argument, he stated that the demand was barred by limitation having come after six years of registration.

The definition of a consulting engineer as per Section 65(31) of the Finance Act is "any professionally qualified engineer or engineering firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering." The sine qua non to be considered a consulting engineer is professional qualification in engineering. The architect in question had a B.Arch degree. Trade Notice No 1/98 ST of January 5, 1998, issued by the Commissioner of Central Excise, Delhi, reiterated the point that an architect is not a consulting engineer and vice-versa.

The S. B. Gopalakrishna case decided by the CESTAT Bangalore (2004 164 ELT 185) confirmed the fact that the advice offered by an engineer on the basis of his engineering knowledge in respect of immovable property valuation would certainly amount to an advice which is integrally connected with the engineering discipline. Hence, when an engineer becomes a registered valuer of immovable property/plant and machinery, he is obviously rendering the service as a "consulting engineer" within the meaning of Section 65(48)(g) of the Finance Act 1994.

In addition to these cases, there have been others, such as Coal Handlers Pvt Ltd vs Commissioner of Central Excise, Calcutta (2004 171 ELT 191), where it was held that insurance and C&F services would fall under that specific head and could not be classified under the generic business auxiliary service. The rationale of all these decisions seems to be that to get taxed, the service provided should match the definition to a T.

One hopes this does not turn into a tax-planning device since a service provider providing a plethora of services could pick and choose the services on which he could levy a service tax. Although the Finance Act 1994 itself provides exemptions within services, one gets the impression that this may not have been the intention of the legislature when the law was originally enacted.

In the present form, in some instances, it throws the concept of neutrality, one of the fundamental canons of taxation, out of the door.

One can expect some changes in the next Finance Bill, paving the way, perhaps, for the Goods and Service Tax Act which is yet on the drawing board of the Finance Ministry. The expression "sooner rather than later" could not fit any legislation better.

(The author is Hyderabad-based chartered accountant.)

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A matter of construction