Service Tax Valuation Rules, 2006 By: A.Saiprasad B.Com, LLB, ACA, DISA, AMIMA Advocate 1

Service Tax Valuation Rules, 2006

By:

A.Saiprasad

B.Com, LLB, ACA, DISA, AMIMA

Advocate1

Session Overview

Valuation Vis-à-Vis Negative List Historical Background Valuation Section Valuation Rules Alternative Valuation Mechanisms

Service Tax Rules, 94 (word document)

Abatement Notification No.26/12 ST (word document)

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Valuation Vis-à-vis Negative List

Broad Scheme remains as before Marginal changes to align with new system of taxation

Works Contract Previously - Rule 2A of Valn Rules or Composition scheme – Alternative/

Mutually exclusive

Presently – Unified scheme – Subsumes Composition Scheme

Catering Service/ Restaurant Service Previously – Abatement – Ntfn No. 1/06 ST

Presently – New Rule 2C of Valuation Rules

Additions to inclusions/ exclusions - Rule 6 Abatement Notification – Provision of Credit

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Historical Background Section 67 – Initial Avatar – Separate valuation for

each service.

FA, 2001 Inserted New S. 67 Value = Gross amount charged by the service provider

for such service rendered by him. Explanation – Inclusions and Exclusions.

FA, 2006 w.e.f.18.4.2006 Present S.67 inserted. ST Valuation Rules Notified Press Release (II) F.No.B1/4/2006-TRU dt.19.4.06

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Sec.67 – Valuation Provision - I

Where consideration is entirely in monetary terms: Value = Gross amount charged By the service provider For such service provided or To be provided by him;

Sec. 67(i) Significance of ‘provided or to be provided’ R/w Rule 3 of POTR, 2011

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Sec.67 – Valuation Provision – II

Where consideration is not entirely in money: 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;

Sec 67(ii)

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Sec.67 – Valuation Provision – III

Where consideration is not ascertainable: Be the amount As may be determined In the prescribed manner

Prescription – Service Tax Valuation Rules, 2006 Sec 67(iii)

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Sec.67 – Valuation Provision – IV

What is Gross Amount when service tax not charged separately?

Sec 67(2) Cum Duty Value MRF Case – 1987 (27) ELT 553 (SC)

Value = (Cum Duty Price)/ (1 +R) R = Rate of Tax

For those demands where ST has not been charged.

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Sec.67 – Valuation Provision – V

Meaning of Sec 67(2) CCE & C V. Advantage Media Consultant, 2008 10 (STR),

449 (T) Amount collected should be considered as inclusive of

service tax. – But Why?

Municipal Corporation of Delhi V. CST, 2009 16 STR 654 (T)

Bholanath Oberoi Sons V. CCE & ST, 2009 15 STR 61 (T)

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Sec.67 – Valuation Provision – VI

The gross amount charged shall include Any amount received Towards the taxable service Before, During or After Provision of such service.

Advance sought to be taxed Sec 67(3)

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Sec.67 – Valuation Provision – VII

Subject to sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed Prescription is as per Service Tax (Determination of Value) Rules,

2006 Valuation Rules is applicable only if value not ascertainable as

per S.67(1),(2) & (3) or In addition to Sec 67 ? Similar to S.4(1)(a) & 4(1)(b) of CEA, 1944 or Section 14 of

Customs Act, 1962 ? S.67(4)

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Sec.67 – Valuation Provision – VIII

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

Expln (a) to S.67 Actual Meaning – Quid Pro Quo Contract’s Act – S.2(d)

Service V. Declared Service S.65B(44) V. S.66E Agreeing to the obligation to refrain from an act, or to

tolerate an act or a situation, or to do an act S.66E(e)

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Sec.67 – Valuation Provision – X

Explanation (c) to Sec 67: 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

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Sec.67 – Valuation Provision – XI

Gross Amount charged - Associated Enterprises: Book adjustment, and Any amount credited or debited, 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. Inserted w.e.f. 10.5.2008

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Sec.67 – Valuation Provision – XII

Associated Enterprise means AE as per Sec.92A of the IT Act, 1961.

Person Liable to pay tax – Defined U/r 2(1)(d) of STR, 94 – 8 categories of persons

To avoid transactions where service is rendered but payment is not made

Book Adjustment and A/c Cr & Dr applicable only for AE Circular No.334/1/2008-TRU dt.29.2.08

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Sec.67 – Valuation Provision – XIII

Money defined – S.65B(33) “money” means legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque money order, postal or electronic remittance or any such similar instrument but shall not include

any currency that is held for its numismatic value Transaction in money – S.65B(44)

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Valuation Concepts - I

If service performed free of charge? Fee Collected by Public Authority for performing statutory

functions/ duties? Required to perform as per law Collect fee, which is deposited to Govt A/c. Circular No.96/7/2007-ST dt.23.8.07.

Audit by C & AG Regional Reference Std Laboratories RTO Directorate of Boilers Department to certify petroleum storage tanks

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Valuation Concepts - II

Consideration vis-à-vis Donation With obligation Without any obligation CKP Mandal V. CCE, 2006 5 STT 1 (Bom.)

Consideration Vis-à-vis Grants for R & D Cultural Society of Angamally V. CCE, 2007 8 STR 155 (T) Circular No.127/9/2010-ST dt.16.8.10 Amount must be charged for provision of service

Amounts other than for provision of service

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Service Tax (Determination of Value), Rules 2006

Inserted w.e.f. 19.4.06 a/w new S. 67 Notification No.12/06-ST Power to Notify - U/s 94(2)(aa) Section 94 – Power delegated to CG to make rules S.94(2)(aa) - The determination of amount and value

of taxable service under section 67

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Service Tax (Determination of Value), Rules 2006 – Rule 2A

Valuation of Works Contract – Rule 2A Amended by Ntfn No.24/12 ST dt.6.6.12 Value of service portion of Works Contract

(Gross amount charged - Value of transfer of property in goods transferred)

Gross amount charged shall not include Value Added Tax (VAT) or sales tax paid on transfer of property in goods. Explanation (a) to Rule 2A(i)

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Service Tax (Determination of Value), Rules 2006 - Rule 2A

Value of works contract service shall include, - (i) labour charges for execution of the works; (ii) amount paid to a sub-contractor for labour and

services; (iii) charges for planning, designing and architect’s fees; (iv) charges for obtaining on hire or otherwise,

machinery and tools used for the execution of the works contract

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(v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services; Explanation (b) to Rule 2A(i) Gannon Dunkerley & Co V. State of Rajasthan, 1993 (88) STC

204 (SC)

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Where VAT paid on actual value of goods, Such value adopted for VAT Taken as value of goods transferred Reduced from Gross Amount

Rule 2A(ii)

If VAT not paid for any reason?

If VAT paid but on composition scheme?

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Valuation – Step I Where VAT paid on actual value of goods:

Such value adopted for the purposes of VAT, Shall be value of transfer of property

W/C = (Gross Value – Value of goods adopted for VAT)

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Valuation – Step II When not determined as per Step I, and not merely as an

option: (A) - Original works: 40% of the total amount (B) - Maintenance or Repair or Reconditioning or Restoration or

Servicing of goods: 70% of total amount Other that (A) & (B) – 60% of total amount

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Original works means : Expln 1 to Rule 2A(ii)(C) All new constructions; Additions and alterations to abandoned or damaged structures

on land, required to make them workable Erection, Commissioning or Installation of plant, machinery or

Eqpt or Structure, pre-fabricated or otherwise

Cenvat Credit on inputs – Expln 2 to Rule 2A(ii)(D) Input Definition - Rule 2(k) of CCR, 04

It allows Cr in certain cases for W/c, Construction Service!! How to reconcile the aforesaid provisions?

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Total Amount – Rule 2A(ii)(D) Gross Amt Charged and Fair Market Value of all goods and services supplied In or in relation to execution of W/c Whether or not supplied under the same contract or any

other contract After deducting

Amount charged for such goods and services VAT or ST levied thereon

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Determination of Total Amount

1. Gross amount received excluding taxes 80,00,000

2. Fair market value of goods supplied by the service receiver excluding taxes 50,00,000

3. Amount charged by service receiver for (2) above 10,00,000

4.Total amount charged (1+2-3) 1,20,00,000 5.Value of service portion(40% of 4 in case of

original works) 48,00,000

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Service Tax (Determination of Value), Rules 2006 - Rule 2B

Foreign Exchange Broking Service & Banking & Other Financial Service

R.2B -Valuation of Sale of Foreign Currency $1,000 sold @ Rs.45/$ RBI Reference Rate Rs.45.50 Taxable Value = (Selling Rate - RBI reference Rate) X Total Units of Currency (Rs.45.50 – Rs.45) X 1,000 = Rs.500

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R.2B – Valuation of Purchase of Foreign Currency INR 70,000 changed for GBP @ Rs.70/GBP

Hence 1,000 GBP exchanged

RBI Reference Rate – Rs.69

Taxable Value = (Rs.70 – Rs.69) X 1,000 = Rs.1,000

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RBI Reference Rate not available Taxable Value = 1% of the Gross Amount of INR

PROVIDED OR RECEIVED Neither Currency exchanged in INR

Taxable Value = 1% of the LESSER of the two amounts the person charging the money would have RECEIVED by converting any of the two currencies into INR at the reference rate provided by RBI

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Service Tax (Determination of Value), Rules 2006 - Rule 2C

New Rule 2C inserted in Valuation Rules, 2006 by Notification No.24/12 ST dt.6.6.12

Service portion in an activity of serving food Restaurant – 40% of Total Amount Outdoor Caterer – 60% of Total Amount

Cenvat available ? On Capital Goods, Input Services ? On Inputs from chapter 1 to 22 of CETA, 85

Total Amount – Similar to works contract. Bundled Service – Food + Premise – Ntfn 26/12

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Service Tax (Determination of Value), Rules 2006 - Rule 3

Consideration received is not wholly or partly in money Value = Gross amount charged by the service provider to provide

similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;

Nat Steel Equipment Pvt Ltd V. CCE, 1988 (34) ELT 8 (SC) Meaning of the term ‘similar’

Rule 3(a)

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Service Tax (Determination of Value), Rules 2006 – Rule 3

When value finally not determinable Value = Equivalent Money Value Which shall, in no case be less than the cost of

provision of such taxable service. Cost V. Value - Difference

Rule 3(b)

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Value can be verified by CEO Rule 4(1)

When value is not determined according to Sec 67 and Rules then; SCN to be issued

When can SCN be issued? What does SCN ask ?

Value provided in SCN should not be adopted Rule 4(2)

CEO shall determine value after hearing Rule 4(3)

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Expenditure or Cost Incurred by Service Provider & Not Receiver In course of providing taxable service Treated as Consideration Shall be included in the value

Rule 5(1) Circular No.B1/4/2006-TRU dt.19.4.06

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Intercontinental Consultants & Technocrats P Ltd V. UOI, 2013 (29) STR 9 (Del)

Sercon India Pvt Ltd V. CST, 2013 (30) STR 454 (Del) Rule 5(1) struck down as Ultra vires S. 67 Gross amount charged does not cover expenditure or

costs Rule 5(1)

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Expenditure or Cost incurred by ‘Pure Agent’ Excluded from Value of Taxable Services

Conditions: Service Recipient actually uses the goods or services Service Recipient actually liable to make payment to the third

party; Service Recipient authorises service provider to incur

expenditure or Cost;

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Service Recipient aware that goods and services for which payment is made by service receiver is actually provided by a third party

Such payment separately indicated in the invoice issued by the service provider to the Service Recipient;

Only Actual amount recovered by service provider

Goods or services procured by the service provider are in addition to the actual services provided.

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Meaning of Pure Agent: Contractual agreement with Service Recipient to act as pure

agent and to incur expenditure or costs Neither intends to hold nor holds any title to the goods or

services so procured or provided Service provider does not use such goods or services for himself Receives only actual amount from Service Recipient

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Re-imbursement not includable in value: Bhagyanagar Services v. CCE, 2006 (4) S.T.R. 22 E.V. Mathai & Co. v. CCE 2006 (3) S.T.R. 116 Keralam Enterprises v. CCE 2008 (9) S.T.R. 503 U.M. Thariath & Co. v. CCE 2007 (8) S.T.R. 161 Nandhini Warehousing Crop. v. CCE 2007 (8) S.T.R. 511 Jaylaxmi Enterprises v. CCE 2008 (9) S.T.R. 19 B.S. Refrigeration Ltd. v. CCE 2006 (4) S.T.R. 103 Rolex Logistics P. Ltd. v. CST 2009 (13) S.T.R. 147

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Re-imbursement includable in value: Naresh Kumar & Co. Pvt. Ltd. 2008 (11) S.T.R. 578 Kirloskar Pneumatics Co. Ltd. 2011-TIOL-453-CESTAT-MUM and Harveen & Co. [2011-TIOL-848-CESTAT-DEL]

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Rule 5 – Basically relates to re-imbursement of expenses Legal or contractual Obligation of service receiver To pay to third party The said amount paid by service provider The amount is paid on behalf of service recipient

Whether the expense was in the nature of inputs or input services? If yes – not a reimbursement. Cr may be available as input/ input service

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Costs in the nature of inputs and input services cannot be treated as reimbursements.

No legal justification to artificially split cost: Partly as cost of services (inputs + input service)

Rest as reimbursable expenses

Sri Bhagavathy Traders V. CCE, 2011 (24) STR 290 (T - LB) When will re-imbursement arise? Service provider under no obligation, but pays & recovers from

service receiver – reimbursement Then not included in the value of service

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Inclusions: - Rule 6(1) Commission or Brokerage charged by Broker Premium charged by the insurer from the policy holder; Commission received by the air travel agent from the airline; Commission, received by an actuary, or intermediary or insurance

intermediary or insurance agent from the insurer; Reimbursement received by the ` service station, from

manufacturer for carrying out service of any motor car

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Commission - rail travel agent from the Railways or the customer; Remuneration or commission, paid to a C & F agent Commission - insurance auxiliary services provided by an

insurance agent. Demurrage charges - service beyond period originally contracted –

Inserted w.e.f. 1.7.12

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Exclusions:- Rule 6(2) Initial deposit made by the subscriber at the time of application

for telephone connection or pager or FAX or telegraph or telex or for leased circuit;

Airfare collected by air travel agent in respect of service provided by him;

Rail fare collected by [rail travel agent] in respect of service provided by him;

Interest on loans.

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Taxes levied by Government on passenger traveling by air, if shown separately on the ticket

Inserted w.e.f. 1.7.12 Accidental damages due to unforeseen action not relatable to

the provision of service; Subsidies or grants disbursed by the Government, not in the

nature of directly influencing the value of service.

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Thank You

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Documents

Service Tax Valuation Rules, 2006 By: A.Saiprasad B.Com, LLB, ACA, DISA, AMIMA Advocate 1