Service Tax

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Service Tax
Valuation Of Services
By Vipin Jain, Advocate (B.com, FCA,
LLB) Partner Tax Laws Chambers
April 4, 2009
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Valuation Of Taxable Services Road Map

• Section 67 Valuation of Taxable Services.
• Service Tax (Determination of Value) Rules, 2006.

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Section 67 Valuation of taxable services for
charging service tax

• (1) Subject to the provisions of this Chapter,
  where service tax is chargeable on any taxable
  service with reference to its value, then such
  value shall,
• (i) in a case where the provision of service is
  for a consideration in money, be the gross amount
  charged by the service provider for such service
  provided or to be provided by him
• (ii) in a case where the provision of service is
  for a consideration not wholly or partly
  consisting of money, be such amount in money as,
  with the addition of service tax charged, is
  equivalent to the consideration

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• (iii) in a case where the provision of service
  is for a consideration which is not
  ascertainable, be the amount as may be determined
  in the prescribed manner.
• (2) Where the gross amount charged by a service
  provider, for the service provided or to be
  provided is inclusive of service tax payable, the
  value of such taxable service shall be such
  amount as, with the addition of tax payable, is
  equal to the gross amount charged.
• (3) The gross amount charged for the taxable
  service shall include any amount received towards
  the taxable service before, during or after
  provision of such service.
• (4) Subject to the provisions of sub-sections
  (1), (2) and (3), the value shall be determined
  in such manner as may be prescribed.

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• Explanation. For the purposes of this section,
• (a) consideration includes any amount that is
  payable for the taxable services provided or to
  be provided
• (b) money includes any currency, cheque,
  promissory note, letter of credit, draft, pay
  order, travellers cheque, money order, postal
  remittance and other similar instruments but does
  not include currency that is held for its
  numismatic value
• (c) gross amount charged includes payment by
  cheque, credit card, deduction from account and
  any form of payment by issue of credit notes or
  debit notes and book adjustment, and any amount
  credited or debited, as the case may be, to any
  account whether called suspense account or by
  any other name, in the books of account of a
  person liable to pay service tax, where the
  transaction of taxable service is with any
  associated enterprise.

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• Section 65 (7b), associated enterprise has the
  meaning assigned to it in section 92A of the
  Income Tax Act , 1961.
• As per Section 92A of the Income Tax Act, 1961
  
• An enterprise would be regarded as an associated
  enterprise of another, if -
• a. it participates , directly or indirectly , or
  through one or more intermediaries , in the
  management or control or capital of the other
  enterprise or
• b. in respect of it one or more persons who
  participate , directly or indirectly , or through
  one or more intermediaries , in its management or
  control or capital , are the same persons who
  participate , directly or indirectly ,or through
  one or more intermediaries ,in the management or
  control or capital of the other enterprise.

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Analysis of Section 67 (1)
Three situations are contemplated in section 67
(1)
Situation 1 When consideration is wholly
received in money
Situation 2 When consideration is not wholly or
partly in money
Situation 3 When consideration is not
ascertainable

• Consideration includes any amount that is
  payable for the taxable
• services provided or to be provided.

• Money includes any currency, cheque,
  promissory note, letter of credit,
• draft, pay order, travellers cheque, money
  order, postal remittance and other
• similar instruments but does not include currency
  that is held for its numismatic value.

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Situation 1
When consideration is wholly received in money
Gross Amount Charged (for service provided or to
be provided)

• Gross Amount Charged includes payment by
  cheque, credit card, deduction from account and
  any form of payment by issue of credit notes or
  debit notes and book adjustment, and any amount
  credited or debited, as the case may be , to any
  account whether called Suspense account or by
  any other name, in the books of account of a
  person liable to pay service tax, where the
  transaction of taxable service is with any
  associated enterprise.

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• By virtue of sub-section (3) to section 67
  Gross Amount Charged shall include any amount
  received towards taxable service before, during
  or after provision of such service
• By virtue of sub-section (2) to section 67 When
  Gross Amount Charged is inclusive of service tax
• Value of taxable service Gross Amount
  Charged X 100
  
• 
  100 Rate of Tax

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Situation 2
When consideration is not wholly or partly in
money
Bare text of the sub-clause (ii) reads thus
in a case where the provision of service is
for a consideration not wholly or partly
consisting of money, be such amount in money as,
with the addition of service tax charged, is
equivalent to the consideration
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• A case of poor and ambiguous drafting
• Whether not qualifies only wholly or both
  wholly and partly is question which remains
  unanswered
• There can be two possible interpretations about
  what this clause contemplates viz.
• (a) where the consideration is partly in money
  and partly in kind
• or
• (b) it is a pure barter transaction.

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Situation 3
When consideration is not ascertainable
As may be determined in the prescribed manner
Service Tax (Determination of Value) Rules, 2006
(Valuation Rules)
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Valuation Rules

• Rules framed in exercise of powers conferred by
  section 94 (2) (aa) of Finance Act, 1994.
• Notified by Notification No. 12/2006 ST dated
• 19-4-2006.
• Title - Service Tax (Determination of Value)
  Rules, 2006.

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Service Tax (Determination of Value) Rules, 2006

• Rule 3. Manner of determination of value.
• Where the consideration received is not wholly or
  partly consisting of money
• Value of taxable service shall be
• gross amount charged
• by the service provider
• to provide similar service
• to any other person
• in the ordinary course of trade
• gross amount charged is the sole consideration

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• Where value cannot be determined as above, Value
  of taxable service shall be
• the equivalent money value of such consideration
• but
• not less than the cost of provision of such
  taxable service.

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• Cost of provision of taxable service has not been
  defined anywhere in the rules.
• Whether the cost refers only to direct costs or
  also includes indirect cost and overheads is a
  debatable issue?
• The only aid available in the Rules seems to be
  rule 5(1) ie. the cost/expenditure incurred in
  course of provision of taxable service.

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Service Tax (Determination of Value) Rules, 2006

• Rule 4 Rejection of Value
• It empowers the officer to satisfy himself as
  to the accuracy of the valuation.
• If Central Excise officer is satisfied that the
  value is not determined as per provisions of the
  Act, a show cause notice may be issued
  specifying the amount proposed to be the value
  of services.
• After providing a reasonable opportunity of
  being heard, value may be determined in
• accordance with the Act.

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Service Tax (Determination of Value) Rules, 2006

• Rule 5 Inclusions/ Exclusions of certain
  expenditure or costs
• Value of taxable service shall include
• Any expenditure or costs incurred by the
  service provider in the course of providing
  taxable service.
• Value of taxable service shall exclude
• Expenditure or costs incurred by service
  provider as pure agent of the recipient of
  service, if the following conditions are
  satisfied namely . . .

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• Conditions to be satisfied for exclusion of the
  expenditure or costs incurred by a pure agent
• the service provider acts as a pure agent of the
  recipient of service when he makes payment to
  third party for the goods or services procured
• the recipient of service receives and uses the
  goods or services so procured by the service
  provider in his capacity as  pure agent of the
  recipient of service
• the recipient of service is liable to make
  payment to the third party
• the recipient of service authorises the service
  provider to make payment on his behalf

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• Conditions to be satisfied for exclusion of the
  expenditure or costs incurred by a pure agent
• the recipient of service knows that the goods and
  services for which payment has been made by the 
  service provider shall be provided by the  third
  party
• the payment made by the service provider on
  behalf of the recipient of service has been
  separately indicated in the invoice issued by the
  service provider to the recipient of service
• the service provider recovers from the recipient
  of service only such amount as has been paid by
  him to the third party and

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• Conditions to be satisfied for exclusion of the
  expenditure or costs incurred by a pure agent
• the goods or services procured by the service
  provider from the third party as a pure agent of
  the recipient of service are in addition to the
  services he provides on his own account

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• What is meant by Pure Agent?
• As per Explanation 1 to Rule 5(2)
• 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.

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Illustrations to Rule 5

• Illustration 1 X contracts with Y, a real
  estate agent to sell his house and thereupon Y
  gives an advertisement in television. Y billed X
  including charges for Television advertisement
  and paid service tax on the total consideration
  billed. In such a case, consideration for the
  service provided is what X pays to Y. Y does not
  act as an

agent on behalf of X when obtaining the
television advertisement even if the cost of
television advertisement is mentioned separately
in the invoice issue by X. Advertising service
is an input service for the estate agent in order
to enable or facilitate him to perform his
services as an estate agent
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• Illustration 2. In the course of providing a
  taxable service, a service provider incurs costs
  such as travelling expenses, postage, telephone,
  etc., and may indicate these items separately on
  the invoice issued to the recipient of service.
  In such a case, the service provider is not
  acting as an agent of the recipient of service
  but procures such input service on his

own account of providing the taxable service.
Such expenses do not become reimbursable
expenditure merely because they are indicated
separately in the invoice issued by the service
provider to the recipient of service.
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• Illustration 3 A contracts with B, an architect
  for building a house, During the course of
  providing the taxable service, B incurs expenses
  such as telephone charges, air travel tickets,
  hotel accommodation, etc., to enable him to
  effectively perform the provision of service to
  A. In such a case, in

whatever form B recovers such expenditure from
A, whether as a separately itemised expense or as
part of an inclusive overall fee, service tax is
payable on the total amount charged by B. Value
of taxable service for charging service tax is
what A pays to B
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• Illustration 4 Company X provides a taxable
  service of rent- acab by providing
  chauffeur-riven cars for overseas visitors. The
  chauffeur is given a lump sum amount to cover his
  foods and overnight accommodation and any other
  incidental expenses such as parking fees by the
  Company X during the tour. At the end of the
  tour, the chauffer returns the balance of

the amount with a statement with of his expenses
and the relevant bills. Company X charges these
amounts from the recipient of service. The cost
incurred by the chauffeur and billed to the
recipient of service constitutes part of gross
amount charged for the provision of services by
the company X. BACK
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Service Tax (Determination of Value) Rules, 2006

• Rule 6 Cases in which the commission, costs,
  etc., will be included or excluded
• Value of taxable services shall include
• the commission or brokerage charged by a broker
  on the sale or purchase of securities including
  the commission or brokerage paid by the
  stock-broker to any sub-broker
• the adjustments made by the telegraph authority
  from any deposits made by the subscriber at the
  time of application for telephone connection or
  pager or facsimile or telegraph or telex or for
  leased circuit

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• the amount of premium charged by the insurer from
  the policy holder
• the commission received by the air travel agent
  from the airline
• the commission, fee or any other sum received by
  an actuary, or intermediary or insurance
  intermediary or insurance agent from the insurer
• the reimbursement received by the authorised
  service station, from manufacturer for carrying
  out any service of any motor car, light motor
  vehicle or two wheeled motor vehicle manufactured
  by such manufacturer
• the commission or any amount received by the rail
  travel agent from the Railways or
• the customer

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• the remuneration or commission, by whatever name
  called, paid to such agent by the client engaging
  such agent for the services provided by a
  clearing and forwarding agent to a client
  rendering services of clearing and forwarding
  operations in any manner and
• the commission, fee or any other sum, by whatever
  name called, paid to such agent by the insurer
  appointing such agent in relation to insurance
  auxiliary services provided by an insurance agent.

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• Value of taxable services does not include
• initial deposit made by the subscriber at the
  time of application for telephone connection or
  pager or facsimile (FAX) or telegraph or telex or
  for leased circuit
• the airfare collected by air travel agent in
  respect of service provided by him
• the rail fare collected by rail travel agent in
  respect of service provided by him and
• interest on loans

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Service Tax (Determination of Value) Rules, 2006

• Rule 7 Value of taxable service provided from
  outside India.
• Service received under the provisions of
  section 66A
• Value of taxable service Actual consideration
  charged for the services provided or to be
  provided
• Services partly performed in India
• Rule 3 (ii) of Taxation of Services (Provided
  from Outside India and Received in India) Rules,
  2006
• Value of taxable service Total consideration
  paid by the recipient of such services
  including the value of service partly performed
  outside India

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Service Tax (Determination of Value) Rules, 2006
Works Contract

• Rule 2A Determination of value of services
  involved in the execution of a works contract
  defined in section 65(105)(zzzza)

• Value of works contract service
• Gross Amount Charged for Works Contract
• Less Value of transfer of property in goods
  involved in the execution of works contract

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• Gross Amount Charged for Works Contract
• shall not include Value Added Tax (VAT) or
  sales tax paid, if any, on transfer of property
  in goods involved in the execution of the said
  works contract
• but shall include-
• labour charges
• payment to sub-contractor for labour and
  services
• charges for planning, designing and architects
  fees
• charges for machinery, tools on hire or
  otherwise etc
• cost of consumables such as water, electricity,
  fuel
• cost of establishment of the contractor
  relatable to
• supply of labour and services
• other similar expenses relatable to supply of
  labour and
• services
• profits earned by the service provider for the
  same.

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• Value of transfer of property in goods involved
  in the execution of the works contract
• Where VAT or sales tax has been paid on the
  actual value of transfer of property in goods,
• Value adopted for the purpose of payment of VAT
  or sales tax shall be taken as Value of
  transfer of property in the said goods for
  determining the value of works contract.

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Thank You
Vipin Jain, Tax Laws Chambers 19th Floor,
Nirmal, 241/242 Nariman Point, Mumbai 400
021. Email info_at_lawschamber.com