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CBEC Clarify “Completion of Services” on Issuance of Invoice
The Central Board of Excise and Customs ("CBEC") has clarified the term 'completion of services' in the context of issuance of invoices under the Point of Taxation Rules, 2011 ("PoTR") and Service Tax Rules, 1994 ("Rules"). This clarification also applies in case of continuous supply of service. Taxand India looks at the ruling.
The PoTR have been notified from 1 April 2011 for the purpose of collection of service tax and determination of the rate of tax. Under these rules, point of taxation shall be the earliest of the following dates:
- date of invoice (where invoice is issued within 14 days of completion of service)
- date of completion of service (where invoice is not issued within 14 days of completion of service)
- date of payment receipt of payment (including advance).
The Rules stipulate issue of invoice within 14 days of completion of service or receipt of payment, whichever is earlier.
Thus, the date of 'completion of service' is a key factor to determine the point of taxation and the due date for issue of invoice; however, this term is not defined under the Finance Act, 1994 ("Act"), the PoTR or the Rules.
Services being intangible, the determination of the date of completion of service is a challenge and could potentially be subject to varied interpretations. In many situations, though services may be said to be provided, issue of invoice is subject to client approval / certification. In these cases, the issue of invoice within 14 days from actual completion date under the Rules is not practical since the issuance of the invoice is dependent on such client acceptance.
Recognising this difficulty and basis representation from industry, the CBEC has issued a circular clarifying the term 'completion of service':
- the completion of service would not only include the physical task of accomplishment of the service but also the completion of all other auxiliary activities that enable the service provider to issue the invoice
- such activities could include measurement, quality testing, etc which may be essential pre-requisites for identification of completion of service
- such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice
- this interpretation also applies to determination of the date of completion of provision of service in case of "continuous supply of service".
The circular thus explains that the test to determine the completion of a service is the completion of all the related activities that enable the service provider to issue an invoice.
This circular is useful for service providers to determine the date of 'completion of service' for issuance of invoice. In case of continuous supply of services, the determination of completion would also be relevant with respect to each milestone or stage completion, for which payment accrues.
Given the language used in the circular, the auxiliary activities listed appear to be illustrative and can therefore include any activity which the parties agree as being essential for deeming the service as completed.
While this circular could serve as a guide to determine date of completion in different scenarios, it is advisable to explicitly provide in the service contract as to what constitutes "completion of service" as also list all auxiliary activities necessary for determination of service completion and issuance of invoice.
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