BACK GROUND:It all started with a funny statement made by then Finance Minister that Lawyers do not render

services thus Government is not considering to levy Service Tax on them, however, by the Finance Act, 2009 effective from 01.09.2009, Service Tax was imposed in a limited way on legal services. The Finance Minister in his Budget Speech stated as:133. As the Honble Members are aware, services provided by chartered accountants, cost accountants, and company secretaries as well as by engineering and management consultants are presently charged to service tax. Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree! As such, I propose to extend service tax on advice, consultancy or technical assistance provided in the field of law. This tax would not be applicable in case the service provider or the service receiver is an individual. Much before, 2009, Government, in year 1999, has issued a letter with respect to Management Consultant Services wherein it has been stated that services rendered by ESI, PP and other industrial law practitioners are in the nature providing secretarial assistance in filling up of various returns and forms, maintenance of records which do not involve any change or improvement in the existing system of management of organizations, thus such law practitioners are not covered under the scope of 'Management Consultant Services. As we understand, in year 2009, government was under impression that there might be steer opposition from the lawyers, thus, Government had taxed only to whom, who were rendering taxable services as a business entity (mainly law firms) and individual lawyers who were representing their clients before courts were specifically excluded from the imposition of the service tax, however, dream of individual lawyers are being shattered by Government altering the statute by Finance Act, 2011 with effect from 1.05.2011. Relevant section of the finance act, as stood today, is extracted as under:-

Section 65. In this chapter, unless the context otherwise requires,(105) taxable service means any provided or to be provided,(zzzzm) (i) (ii) (iii) to any person, by a business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner; to any business entity, by any person, in relation to representational services before any court, tribunal or authority; to any business entity, by an arbitral tribunal, in respect of arbitration.

Explanation.- For the purposes of this item, the expressions arbitration and arbitral tribunal shall have the meaning respectively assigned to them in the Arbitration and Conciliation Act, 1996 The term business entity defined under the act includes an association of persons, body of individuals, company or firm but does not include an individual. Thus, intention of the legislature is very clear from the aforesaid provision, according to which, advisory services by law firm, whether partnership or proprietorship, to any person including individual and representational services by any person including individual lawyers to business entity, whether incorporated company or partnership or proprietorship shall be taxed under new Service Tax provisions, however representational services by individual to individual is still out of purview of the service tax. It is worthwhile to analyze the services being offered by lawyers to a business entity and their taxability under new provisions:Services Offered by a Law Firms:Service Description Meeting with Client Taxability If advisory, then taxable. Business development meeting not taxable If a Law firm brief Sr.Adv. who raises

Briefing to Senior Counsel

bill on Law firm, this is non-taxable, however when law firms raises a bill to a business entity for briefing Sr.Adv. it will attract levy of Service Tax as services will be covered under phrase assistance in any branch of law, in manner. Legal Opinion Taxable, as it gives an input to Management of business entity to consider the legal aspect of the issues, however there is a school of thought which say that as legal opinions are not binding on the management, thus not taxable.

Negotiation on behalf of Client and Taxable drafting of agreement, contracts Vetting of Contracts, Agreement etc Title Report Representation of case before Court Due Diligence Retainer-ship arrangement Taxable Taxable Taxable Taxable Taxable

Service Offered by an Individual Lawyer:Service Description Meeting with Client Briefing to Senior Counsel Taxability Not Taxable If a lawyer brief Sr.Adv. who raises bill on him, this is non-taxable, however when lawyer raises a bill to a business entity for briefing Sr.Adv. as per our understanding, no Service

Tax will be levied as individual lawyers cannot be considered as business entity. Legal Opinion Non-Taxable

Negotiation on behalf of Client and Non-Taxable drafting of agreement, contracts Vetting of Contracts, Agreement etc Title Report Representation of case before Court Due Diligence Retainer-ship arrangement Non-Taxable Non-Taxable Taxable Non-Taxable Non-Taxable

Thus as per the above analysis, individual lawyers, main source of income which is representational services before the court are being taxed, however, if such services are being offered to individual, same are still out of purview of the tax net. Associates & Law Firm:The legal profession has, in recent years, undergone a significant change and has witnessed formation of various law firms and various lawyers are opting to join such law firms as associates/senior associates or principle associates depending upon their experience and other qualifications. A question has been put to us whether such lawyers will be covered under service tax net, as per our understanding such lawyers are not rendering any services to a business entity (law firms) because of:(a) (b) (c)

There is no relationship of service provider and service recipient; They do not perform consultancy or advisory function; and they are being compensated because of their association with the law firm;

(d)

There is contract of service between law firms and such associates.

In this regard, it will be relevant to refer a Circular No.115/09/2009ST dated 31.07.2009 issued by CBEC wherein it has been clarified that independent directors being part of board of directors perform management function and they do not perform any consultancy or advisory function and payments made to the director by the company cannot be considered as payment for providing management consultancy services. Thus, associates who are working in a law firm are not rendering any legal consultancy services to the law firm. ***** Vishnu Langawat & Associates www.vlaindia.com