[By Anasruta Roy]
The author is a student of National University of Advanced Legal Studies.
Introduction
In early July 2024, the RBI published draft regulations titled “Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2024”( henceforth draft regulations), concerning foreign exchange transactions, continuing the government’s trend of policy liberalization in this area.
The proposed regulations introduce several key changes for exporters:
- Expanded declaration requirement: Exporters must now declare the full export value of both goods and services to the designated authority, not just goods and software as before.
- Repatriation timeline: The entire export value must be received and brought back to India within nine months from the date of shipment (for goods) or invoicing (for services).
- Documentation process: Exporters are required to submit a specific declaration form to the designated authority and provide relevant documentation to the Authorized Dealer within 21 calendar days of shipment or invoicing.
- Late submissions: Authorized Dealers may accept documents submitted after the 21-day deadline, subject to their discretion and RBI guidelines.
These changes aim to streamline the export process and ensure timely repatriation of foreign exchange earnings. However, the proposed regulatory changes raise a pertinent question: Would legal professionals offering consultancy services to international clients be required to provide additional documentation for each engagement under these new provisions? There exists a regulatory ambiguity due to conflicting interpretations across various legal frameworks. The Foreign Exchange Management Act (FEMA) includes legal assistance within its purview but excludes contracts of personal service. The Finance Act explicitly categorizes legal assistance as a reportable service. In contrast, consumer courts have interpreted legal services as contracts of personal service.
This inconsistency creates uncertainty regarding whether legal services provided to international clients must be reported in the draft regulations. The article in question examines this regulatory overlap and proposes potential resolutions to this ambiguity.
Service – A Finance Act Perspective
The Finance Act of 2009 expanded the scope of services by introducing clause 105 (zzzzm). This amendment defined taxable services to include advice, consultancy, or assistance in any legal field provided by one business entity to another. However, it explicitly excluded appearances before courts, tribunals, or authorities from this definition.
This amendment sparked controversy, leading to a legal challenge in the case of Advocates Association of Western India v Union of India and Ors. The petitioners (Advocates Association of Western India) argued that the legal profession, traditionally viewed as an integral part of the justice system rather than a commercial enterprise, should not be subject to service tax. They contended that lawyers, as officers of the court, perform a solemn duty rather than providing a service in the conventional sense.
The opposing view held that lawyers do indeed provide a service to their clients, for which they receive compensation. This argument drew parallels between legal professionals and other service providers such as consulting engineers or doctors. It was suggested that while lawyers have unique responsibilities to the court, this does not negate the service aspect of their relationship with clients in the context of service tax applicability.
The court’s decision did not favour the petitioners, allowing for the imposition of a service tax on legal services. However, the case remained under review, and subsequent notifications provided more specific definitions of legal services for taxation purposes, with different tax treatments based on the nature of the legal work performed.
This discussion will not delve into whether such tax is payable in light of the 2012 amendment and the introduction of the negative list regime. The legal discourse and its outcome effectively established that, at least for the purposes of the Finance Act, legal consulting falls within the category of services.
The CPA’s take on Service
The Consumer Protection Acts of 1986 and 2019 define “service” similarly, encompassing various services made available to potential users. However, the definition explicitly excludes services provided free of charge or under personal service contracts.
The court in President Jasbir Singh Malik & Ors v. DK Gandhi PS National Institute of Communicable Diseases and Ors noted that professionals are distinct from business people or traders, and their clients cannot be considered consumers in the traditional sense.
The court defined a profession as a vocation requiring advanced education, particularly in law, medicine, or ministry. They argued that professional services cannot be equated with commercial goods or services as defined in the Consumer Protection Act.
The bench suggested that lawmakers, presumed to be knowledgeable about existing laws, did not intend to include professional services within the Act’s scope. They highlighted the unique role of lawyers in society, emphasizing their duty to act with utmost good faith and integrity.
In examining the relationship between lawyers and clients, the court considered whether it constitutes a contract “for services” or “of service”. They concluded that clients exercise significant control over how lawyers perform their duties, indicating a contract of personal service.
Based on this reasoning, the bench determined that legal services fall under the category of personal service contracts and are therefore excluded from the definition of “service” in the Consumer Protection Act of 2019.
The ambit of services – FEMA lens
To better understand the implications of the draft regulations, it is crucial to examine the definition of “service” as provided in the parent legislation, FEMA 1999. Section 2(zb) of FEMA offers a comprehensive definition that includes various activities, notably encompassing “legal assistance” within its purview. This inclusion suggests that legal services could potentially fall under the declaration requirements of the new regulations.
However, the FEMA definition also introduces a critical exclusion: services rendered under a “contract of personal service” are explicitly exempt from the definition. This exclusion creates a complex scenario, particularly when considering recent legal interpretations regarding the nature of professional services.
The crux of the issue lies in distinguishing between what constitutes “legal assistance” and what falls under a “contract of personal service” in the context of international legal consultancy. This distinction may not always be clear-cut and could vary depending on the specific nature of the services provided and the level of control exercised by the client in each case.
For instance, a lawyer providing general legal advice to an offshore client might be considered as offering “legal assistance”, potentially falling within the scope of the declaration requirements. On the other hand, a lawyer working closely with a client on a specific case, where the client exercises substantial control over the approach and strategy, might be operating under a “contract of personal service”, and thus be exempt from these requirements.
The distinction between legal assistance and a contract of personal service can be understood through cases decided by Indian courts and professional regulations.
In Dharangadhara Chemical Works Ltd vs State Of Saurashtra, the Supreme Court held that “the greater the degree of independence of such control the greater the probability that the services rendered are of the nature of professional services and that the contract is not one of service.” This principle suggests that if a lawyer maintains significant autonomy in their methods and execution of services, it leans towards being classified as legal assistance.
While not explicitly addressed in Indian case law, the ability to serve multiple clients simultaneously is a strong indicator of independence, further supporting the classification as legal assistance. This aligns with the broader principles of professional autonomy.
The Bar Council of India Rules, specifically Rule 15 under Section II, Chapter II, Part VI, which states that “An advocate shall fearlessly uphold the interests of his client by all fair and honourable means,” underscores the ethical obligation of lawyers to maintain professional independence. This rule implicitly supports the notion that most legal services would fall under “legal assistance” rather than personal service, as lawyers are bound to exercise independent judgment in their practice.
Therefore, following the above trend, consultation of offshore clients would fall under the definition of legal assistance, and the requisite declarations would be required to be made under the draft regulations unless clarified otherwise. The alternative would be to evaluate the nature of their service on a case-by-case or even transaction-by-transaction basis to determine the extent of control and whether they are obligated to make declarations under the new regulations. Such a requirement could potentially impose a significant administrative burden on legal professionals engaged in international practice.
Conclusion
The proposed regulations could have far-reaching implications beyond the legal profession, potentially affecting various professionals offering offshore consulting services. A broad interpretation might encompass fields such as management consulting and financial advisory. With the draft open for public comment until September 1, 2024, regulatory authorities should provide clear guidance on the inclusion or exclusion of professional services to offshore clients. Striking the right balance between regulatory requirements and the practicalities of international professional practice will be crucial for effective implementation, ensuring compliance while maintaining the competitiveness of India’s professional services sector globally.