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Valuation under Service Tax
[Submitted by CA. Sudhir V. S.,
B.com, ACA,
Hyderabad, Andhra Pradesh]
September 25, 2007
The issue of valuation is important and critical factor for every
taxing law. Since the tax or duty is payable on the value adopted with the
efforts of the tax payer to reduce tax to a minimum and tax collector
seeking to maximise the same. The value therefore becomes a bone of
contention and leads to increased litigation. The valuation of services
under service tax are governed by Section 67 of the Finance Act 1994 as
amended and the Service Tax (Determination of Value) Rules 2006. The rules
have been prescribed w.e.f. 19.4.2006. The departmental view of the
valuation rules have been set out in F.No. B1/4/2006- TRU dt. 19.4.2006.
This circular specifically supercedes all the earlier circulars in
relation to value.
In the past (prior to 19.4.2006) there was no deeming value for
services provided and the actual amount charged was the value for payment
of Service Tax. The reimbursements, which were contractually to be
provided by the service receiver or those that were not in relation to the
services (unrelated) were allowed as a deduction subject to the evidence
of the same being available.
After 19th June 2006 the new section and rules would apply.
Salient Features
- Where the total consideration for the provision of the services is
received in money from the service receiver the value for such services
is the money received itself. Clause (i) of sub-section (1) of section
67 of chapter V of the Finance Act.
- Where only part of the consideration is in money terms, then the
value of the non- monetary consideration is to be ascertained and
Service Tax on the same is to be paid. Clause (ii) of sub-section (1) of
section 67 of chapter V of the Finance Act.
- Where the non-monetary amount is not determinable the amount
chargeable for Service Tax would an amount charged for similar services
and if that were not available then not less than the costs incurred for
providing the services. The word 'similar' has been understood
judicially as an expansive term and not restrictive like "same". Thus
some resemblance is sufficient. However the quality, time required, size
of the client, urgency of the service, location at which service
required could be issues which would have to be considered before
deciding on the similarity. In case of services in the opinion of the
paper writer this would be impossible. The criterion of cost however
would be relevant and possible to evaluate. Clause (iii) of sub-section
(1) of section 67 of chapter V of the Finance Act.
- In normal course ALL reimbursements of cost or expenditure would be
included in the value of taxable services and tax on the same would be
payable. However reimbursements would be allowed as a deduction only if
the following conditions are met:
- services provided as a pure agent.
- services provided to the client and not to the agent
- the disclosure that the agent is acting on behalf of the client
should be clear.
- the amount charged by the third party is exactly the amount
charged by the agent to the client.
- the agent does not use any of the goods or services so procured.
This means that many of the agreements especially in regard to
facilitation agreements, customer support, clearing and forwarding
agent, professionals and many more would necessarily have to charge the
Service Tax on the gross amount including the out of pocket expenses
incurred. Probably the group companies and a few specialized service
providers would be in a position to claim the reimbursements as a
deduction. Rule 5 of Service Tax (Determination of Value) Rules 2006
- "Pure agent" means a person who -
- Enters into a contractual agreement with the recipient of service
to act as his pure agent to incur expenditure or costs in the course of
providing taxable service
- Neither intends to hold nor holds any title to the goods or
services so procured or provided as pure agent of the recipient of
service
- Does not use such goods or services so procured and
- Receives only the actual amount incurred to procure such goods or
services
- The pure agent would have limited usage as the conditions are
numerous. However the main ad substantive conditions if complied could
keep the reimbursements outside the scope. The same can be applied for
unrelated reimbursable expenditure where the service receiver would know
about the real service provider and no profit in involved.
- The paper writer would also like to note that the entire Valuation
rules as it stands appears to be ultra vires the Act (Section 67) as the
section only envisages a charge for the service per se. However until
the same is quashed or amended there is bound to be disputes.
- The service provider who provides taxable and no taxable services
would now find it extremely difficult to allocate the reimbursements
relating to each of the same. Probably the proportionate method would be
accepted.
- The general abatement for value of goods sold under Not. 12/2003
while providing a service would be on the amount on which the sales tax/
VAT is payable and would not include the reimbursements as the same is
not part of value under those provisions.
- The specific abatements for the services like outdoor catering,
construction, repairs, erection, rent a cab, tour operators, GTA and
others would however be available and could be claimed on the gross
amount payable provided the conditions have been fulfilled.
- The coverage of services for which no amount has been charged has
not been specifically covered. However considering the intention of the
legislative change, even these services could be attempted to be valued.
However considering that the payment of Service Tax is only on receipt
basis this exercise maybe a redundant exercise and services for which
nothing is charged and for which no monetary or non-monetary amounts/
consideration received would still not be taxable.
- The TRU circular however cautions that the written instruction of
the Assistant / Deputy Commissioner should be obtained for such
verification. Further that if department is of the view that the value
requires revision concurrence of the Commissioner is to be taken. This
internal caution however may not be seriously viewed by the officers as
demonstrated in the recent times when a document like a summons (to be
used in exceptional cases) which if not replied can lead to arrest has
been issued en mass to all service providers for assesses in the
construction, transportation and marketing fields business throughout
India.
- The valuation in respect of the newly introduced works contract
service will be the gross amount received by the service receiver in
excess of the value of the transfer of property in goods involved in
execution of such contracts. The value of the transfer of property in
goods can be adopted for the value for which the VAT/Sales tax is paid
under the local laws.
- The value of the works contract service includes labour charges,
amount paid to sub-contractor for labour or service, planning designing
and architect's fee, hire charges paid on machinery or tools,
consumables such as water, electricity, fuel etc, cost, other expenses
and profit involved in supply labour and service.
- In case of some specific service the part of the consideration will
be included for the valuation purpose, namely commission/brokerage by a
stock exchange broker, air travel agent, rail travel agent,
actuary/insurance intermediary or agent, clearing & forwarding agent;
insurance premium charged by the insurer; adjustments made by telegraph
authority for deposits; reimbursement by authorized service station;
- In some of services exclusion has be made for part of the
consideration namely, initial deposit collected by telegraph authority;
air, rail fare collected by air, rail travel agent respectively,
interest on loans by banks and other financial institutes.
- The valuation for the service provided outside India and received in
India to be taxed under section 66A of the Finance Act will be the
amount of actual consideration paid to the service provided situated out
of India. If the part performance is in India, the value will be the
total consideration paid including for the performance in India.
The valuation rules are bound to lead to frustration and repeated
challenge with only the legal intermediaries as the beneficiaries as had
happened in valuation disputes under Central Excise.
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