Valuation under Service Tax Regulation

Mrityunjay Acharjee

AGENDA AGENDA

Statutory provisions relating to Valuation of Statutory provisions relating to Valuation of Taxable Services.Taxable Services.

Service Tax (Determination of Value) RulesService Tax (Determination of Value) Rules Latest amendments in Valuation Rules with Latest amendments in Valuation Rules with

the introduction of ‘Negative List’the introduction of ‘Negative List’ Determination of value of service portion in Determination of value of service portion in

the execution of a works contract.the execution of a works contract.

VALUATION OF SERVICESVALUATION OF SERVICES

Value of Taxable Service shall be the Gross Value of Taxable Service shall be the Gross amount charged by the service provider for amount charged by the service provider for such services provided or to be provided such services provided or to be provided rendered by him.rendered by him.

Tax is payable as soon as advances, if any, is Tax is payable as soon as advances, if any, is receivedreceived

VALUATION OF VALUATION OF TAXABLE SERVICES U/s. 67TAXABLE SERVICES U/s. 67

Where consideration for providing services is Where consideration for providing services is entirely in money, gross amount charged by entirely in money, gross amount charged by service provider/ to be provided shall be the service provider/ to be provided shall be the value of Service.value of Service.

Where consideration is not wholly or partly in Where consideration is not wholly or partly in terms of money, be such amount in money as, terms of money, be such amount in money as, with the addition of service tax charged, is with the addition of service tax charged, is equivalent to the considerationequivalent to the consideration

VALUATION OF VALUATION OF TAXABLE SERVICES U/s. 67TAXABLE SERVICES U/s. 67

Where provision of services is for a Where provision of services is for a consideration which is not ascertainable, the consideration which is not ascertainable, the value would be determined in the prescribed value would be determined in the prescribed manner and as per the Valuation Rules.manner and as per the Valuation Rules.

VALUATION OF TAXABLEVALUATION OF TAXABLE

Where consideration is not wholly or partly inWhere consideration is not wholly or partly in terms of money ( or value not ascertainable)terms of money ( or value not ascertainable) Service Tax is payable :Service Tax is payable :a)a) Value of taxable services shall be equivalent to Value of taxable services shall be equivalent to

the Gross amount charged by the Service the Gross amount charged by the Service Provider to provide similar services to other Provider to provide similar services to other persons in ordinary course of trade , where persons in ordinary course of trade , where Gross amount charged is Sole ConsiderationGross amount charged is Sole Consideration

b)b) In other cases, (not above), Value shall not be In other cases, (not above), Value shall not be less than the Cost of Provision of such Services less than the Cost of Provision of such Services

Non-Monetary ConsiderationNon-Monetary Consideration

Supply of goods and service in return for provision Supply of goods and service in return for provision of serviceof service

Refraining or forbearing to do an Act in return for Refraining or forbearing to do an Act in return for provision of serviceprovision of service

Tolerating an Act or a situation in return for Tolerating an Act or a situation in return for provision of a serviceprovision of a service

Doing or agreeing to do an Act in return for Doing or agreeing to do an Act in return for provision of serviceprovision of service

Service Tax is payable on the fair value of non-Service Tax is payable on the fair value of non-monetary consideration, which is equivalent moneymonetary consideration, which is equivalent money value as determined as per Rules.value as determined as per Rules.

PROVISION OF VALUATION U/s. 67PROVISION OF VALUATION U/s. 67

..

Where Service Tax is inclusive and not chargedWhere Service Tax is inclusive and not charged

separately - value shall be determined on backseparately - value shall be determined on back

calculation basiscalculation basis

Gross amount charged shall include any amount Gross amount charged shall include any amount

received before / during / after such services received before / during / after such services

DETERMINATION OF VALUE - RULESDETERMINATION OF VALUE - RULES

Thee Central Excise / Service Tax Officer can reject Thee Central Excise / Service Tax Officer can reject the value determined by the service provider and the value determined by the service provider and determined value separately. determined value separately.

In case of service provided/ to be provided from In case of service provided/ to be provided from outside India, actual consideration received shall be outside India, actual consideration received shall be relevant for valuationrelevant for valuation

[Rule 7][Rule 7]

PRINCIPLES OF COST ANALYSISPRINCIPLES OF COST ANALYSIS

1.1. Determination of Cost of Taxable ServicesDetermination of Cost of Taxable Services

2.2. ‘‘Cost’ would be worked out on the basis of usual Cost’ would be worked out on the basis of usual Cost Accounting principles Cost Accounting principles

3.3. Certification of Cost / Chartered Accountants for Certification of Cost / Chartered Accountants for determination of Cost of Servicesdetermination of Cost of Services

4.4. Specific Guidelines from ICAI for the purpose of Specific Guidelines from ICAI for the purpose of determination of Cost of Services is neededdetermination of Cost of Services is needed

PRINCIPLES OF COST ANALYSISPRINCIPLES OF COST ANALYSIS

1.1. Value based on Cost of Provision of Services – Value based on Cost of Provision of Services – where reasonable profit (industry average or 10%) where reasonable profit (industry average or 10%) shall be added on total cost of servicesshall be added on total cost of services

2.2. For captive consumption of services – principles For captive consumption of services – principles laid down in CAS-4 issued by ICAI and CBEC laid down in CAS-4 issued by ICAI and CBEC Circular No. 692/8/2003 may be followedCircular No. 692/8/2003 may be followed

3.3. All expenditure and cost relating to provision of All expenditure and cost relating to provision of service incurred by service provider is includable in service incurred by service provider is includable in the value – Rule 5(1) – and shall be treated as the value – Rule 5(1) – and shall be treated as consideration for the taxable servicesconsideration for the taxable services

INCLUSION/EXCLUSION FROM VALUEINCLUSION/EXCLUSION FROM VALUE

1.1. Where any expenditure/cost has been incurred by the Where any expenditure/cost has been incurred by the service provider in the course of providing taxable service provider in the course of providing taxable service – service – all such exp. / costs shall be treated as all such exp. / costs shall be treated as consideration for taxable service provided /consideration for taxable service provided / to be to be provided and shall be included in the value for the provided and shall be included in the value for the purpose of charging Service Tax.purpose of charging Service Tax.

1.1. Where any expenditure or cost incurred by service Where any expenditure or cost incurred by service provider as provider as “Pure Agent”“Pure Agent” of the recipient of service – of the recipient of service – such amount shall be excluded, subject to fulfillment such amount shall be excluded, subject to fulfillment of all eight conditions of all eight conditions

VALUE OF TAXABLE SERVICES VALUE OF TAXABLE SERVICES

Value of the taxable service is the total amount of

consideration consisting of all components of the

taxable service and it is immaterial that the details

of individual components of the total consideration

is indicated separately in the invoice.

In other words, Gross consideration is taxable

(Explanation to Rule 5).

Non-Monetary ConsiderationNon-Monetary Consideration

Supply of goods and service in return for provision Supply of goods and service in return for provision of serviceof service

Refraining or forbearing to do an Act in return for Refraining or forbearing to do an Act in return for provision of serviceprovision of service

Tolerating an Act or a situation in return for Tolerating an Act or a situation in return for provision of a serviceprovision of a service

Doing or agreeing to do an Act in return for Doing or agreeing to do an Act in return for provision of serviceprovision of service

Service Tax is payable on the fair value of non-Service Tax is payable on the fair value of non-monetary consideration, which is equivalent moneymonetary consideration, which is equivalent money value as determined as per Rules.value as determined as per Rules.

PRINCIPLES FOR VALUE DETERMINATIONPRINCIPLES FOR VALUE DETERMINATION

1.1. Circular no. B1/4/2006Circular no. B1/4/2006 – – TRU dated 19.04.2006TRU dated 19.04.2006 :- :- “Value for the purposes of charging Service Tax is “Value for the purposes of charging Service Tax is the gross amount received as consideration for the gross amount received as consideration for provision of service. All expenditure or cost provision of service. All expenditure or cost incurred by the service provider in the course of incurred by the service provider in the course of providing taxable services forms integral part of the providing taxable services forms integral part of the taxable value and includable. taxable value and includable. It is not relevant that It is not relevant that various expenditure or cost has separately indicated various expenditure or cost has separately indicated in the invoice or bill issued by the service provider in the invoice or bill issued by the service provider to his client.”to his client.”

2.2. All earlier circulars stands withdrawnAll earlier circulars stands withdrawn

VALUE OF TAXABLE SERVICES VALUE OF TAXABLE SERVICES

Re-imbursement of expenses incurred on behalf of Re-imbursement of expenses incurred on behalf of

client is not includible – Rule 5(2) - client is not includible – Rule 5(2) -

‘‘Glaxo Smithkline Pharma Ltd. Vs. CCEGlaxo Smithkline Pharma Ltd. Vs. CCE

Deduction available, if conditions for “Pure Agent”Deduction available, if conditions for “Pure Agent”

are fulfilledare fulfilled

LIABILITY OF SERVICE RECEIVER – NOT INCLUDIBLELIABILITY OF SERVICE RECEIVER – NOT INCLUDIBLE

Re-imbursement of expenses claimed by the service Re-imbursement of expenses claimed by the service provider as per agreement, which is a liability of the provider as per agreement, which is a liability of the service receiver – the same should not be included service receiver – the same should not be included in the value – in the value –

‘‘Scott Wilson Kirkpatrick India Ltd. Vs. CCE’Scott Wilson Kirkpatrick India Ltd. Vs. CCE’

MEANING OF “ PURE AGENT “MEANING OF “ PURE AGENT “

Means a person who– (a) 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;

(b) 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;

(c) does not use such goods or services so procured; (d) receives only the actual amount incurred to

procure such goods or services

CONDITIONS FOR EXEMPTION AS PURE AGENTCONDITIONS FOR EXEMPTION AS PURE AGENT

1.1. SP acts as a pure agent while making payment of third SP acts as a pure agent while making payment of third party for goods/services procured.party for goods/services procured.

2.2. The SR received and uses the goods so procured by The SR received and uses the goods so procured by the SP in his capacity as pure agent of SRthe SP in his capacity as pure agent of SR

3.3. The SR is liable to make payment to the third party The SR is liable to make payment to the third party

4.4. The SR authorises the SP to make payment on his The SR authorises the SP to make payment on his behalfbehalf

5.5. The SR is aware that the goods and services for which The SR is aware that the goods and services for which payment has been made by SP shall be provided by a payment has been made by SP shall be provided by a third partythird party

CONDITIONS FOR EXEMPTION AS PURE AGENTCONDITIONS FOR EXEMPTION AS PURE AGENT

6. Payment made by SP on behalf of the SR has been 6. Payment made by SP on behalf of the SR has been separately indicated in the invoice issued by the SPseparately indicated in the invoice issued by the SP

7. The SP recovers from the SR only such amount as has 7. The SP recovers from the SR only such amount as has been paid by him to the third partybeen paid by him to the third party

8. The goods and services procured by the SP from third 8. The goods and services procured by the SP from third party as pure agent are in addition to the services party as pure agent are in addition to the services provided by him on his own capacity.provided by him on his own capacity.

VALUATION OF SERVICES – EXAMPLE 1 VALUATION OF SERVICES – EXAMPLE 1

X contracts with Y, a real estate agent to sell his house and X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid including charges for Television advertisement and paid service tax on the total consideration billedservice tax on the total consideration billed. . What would What would value of Taxable Services. value of Taxable Services.

In such a case, consideration for the service provided is what In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to for the estate agent in order to enable or facilitate him to perform his services as an estate agent perform his services as an estate agent

VALUATION OF SERVICES – EXAMPLE 2VALUATION OF SERVICES – EXAMPLE 2

In the course of providing a taxable service, a service In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. What would be the invoice issued to the recipient of service. What would be the value of taxable services.the value of taxable services.

In such a case, the service provider is not acting as an agent In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice merely because they are indicated separately in the invoice issued by the service provider to the recipient of service. issued by the service provider to the recipient of service.

VALUATION OF SERVICES – EXAMPLE 3VALUATION OF SERVICES – EXAMPLE 3

A contracts with B, an architect for building a house. During A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform accommodation, etc., to enable him to effectively perform the provision of services to A.the provision of services to A.

In such a case, in whatever form B recovers such expenditure In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for amount charged by B. Value of the taxable service for charging service tax is what A pays to B. . charging service tax is what A pays to B. .

VALUATION OF SERVICES – EXAMPLE 4VALUATION OF SERVICES – EXAMPLE 4

Company X provides a taxable service of rent-a-cab by Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients bills. Company X charges these amounts from the recipients of service.of service.

The cost incurred by the chauffeur and billed to the recipient The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the of service constitutes part of gross amount charged for the provision of services by the company X. provision of services by the company X.

NO SERVICE TAX ON FREE SERVICENO SERVICE TAX ON FREE SERVICE

1.1. If service is provided free of charges – No Service If service is provided free of charges – No Service Tax is payable – ‘Tax is payable – ‘Bharti Cellular Ltd. Vs. CCEBharti Cellular Ltd. Vs. CCE

1.1. Free Service provided by authorised vehicle service Free Service provided by authorised vehicle service stations (at the time of sale) for which no payment is stations (at the time of sale) for which no payment is received from anyone and price is included in sale received from anyone and price is included in sale price of such vehicle, the same could not be price of such vehicle, the same could not be subjected to Service Tax - “Indus Motor Company subjected to Service Tax - “Indus Motor Company vs. CCE(2008)vs. CCE(2008)

LEVY OF SERVICE TAX AND EXCISE DUTYLEVY OF SERVICE TAX AND EXCISE DUTY

LEVY OF LEVY OF

SERVICE TAX SERVICE TAX

ON ON

INDIVISIBLE CONTRACTSINDIVISIBLE CONTRACTS

LEVY OF SERVICE TAX AND EXCISE DUTYLEVY OF SERVICE TAX AND EXCISE DUTY

Though, Service Tax and Excise Duty, both Though, Service Tax and Excise Duty, both independent taxes, in certain situation ST is payable independent taxes, in certain situation ST is payable even ED has been paid on the same amount.even ED has been paid on the same amount.

Lincoln Helios India Ltd. Vs CCELincoln Helios India Ltd. Vs CCE, ,

it was held that Service Tax is payable in erecting it was held that Service Tax is payable in erecting and commissioning charges even if excise Duty has and commissioning charges even if excise Duty has been paid on entire value of contract including been paid on entire value of contract including erection and commissioningerection and commissioning

VALUATION – INDIVISIBLE CONTRACTSVALUATION – INDIVISIBLE CONTRACTS

1.1. If such service is covered under ‘Works Contract If such service is covered under ‘Works Contract Service’ – valuation shall as per Rule 2A of Service’ – valuation shall as per Rule 2A of Valuation Rules [Amended through Notification No Valuation Rules [Amended through Notification No 24 of 2012 dated 624 of 2012 dated 6thth June 2012 ] June 2012 ]

2. In other cases – value of the goods can’t be included 2. In other cases – value of the goods can’t be included in the value of servicesin the value of services

- Bharat Sanchar Nigam ltd. Vs. UOI- Bharat Sanchar Nigam ltd. Vs. UOI

- Imagic Creative Pvt. Ltd Vs. CCT- Imagic Creative Pvt. Ltd Vs. CCT

VALUATION OF SERVICES VALUATION OF SERVICES

LEVY OF LEVY OF

SERVICE TAX SERVICE TAX

ON ON

WORKS CONTRACTWORKS CONTRACT

Notification No 24 of 2012 dt 6 June 2012Notification No 24 of 2012 dt 6 June 2012

Determination of Value in Works ContractDetermination of Value in Works Contractas notified by Notification as notified by Notification

No 24 of 2012 dt 6 June 2012No 24 of 2012 dt 6 June 2012

‘‘Works contract’Works contract’ has been defined in section 65B(54) to mean a contract has been defined in section 65B(54) to mean a contract wherein transfer of property in goods involved in the execution of suchwherein transfer of property in goods involved in the execution of such contract is levyable to tax as sale of goods and such contract is for thecontract is levyable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning,purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation,installation, completion, fitting out, improvement, repair, renovation, alteration of any alteration of any building or structure on land or for carrying out anybuilding or structure on land or for carrying out any other similar activity or part thereof in relation to any building orother similar activity or part thereof in relation to any building or structurestructure..

Value of taxable service is also determined in accordance with ‘ServiceValue of taxable service is also determined in accordance with ‘Service Tax (Determination of value)’ Rules, 2012 as amended from time to time.Tax (Determination of value)’ Rules, 2012 as amended from time to time. The amended Service tax (Determination of value)’ Rules, 2012 shallThe amended Service tax (Determination of value)’ Rules, 2012 shall be be effective from 01.07.2012 [vide notification no 24/2012 dated 06.06.12effective from 01.07.2012 [vide notification no 24/2012 dated 06.06.12]. ].

VALUATION OF SERVICES – WORKS CONTRACTVALUATION OF SERVICES – WORKS CONTRACT

Where Value Added Tax, has been paid on the Where Value Added Tax, has been paid on the actual value of transfer of property in goods actual value of transfer of property in goods involved in the execution of the works contract, involved in the execution of the works contract, such value adopted for the purposes of payment of such value adopted for the purposes of payment of VAT, as the case may be, shall be taken as the value VAT, as the case may be, shall be taken as the value of transfer of property in goods involved in the of transfer of property in goods involved in the execution of the said works contract for determining execution of the said works contract for determining the value of works contract service. the value of works contract service.

Determination of Value in Works ContractDetermination of Value in Works ContractValue of works contract as per amended Rule for valuation of taxableValue of works contract as per amended Rule for valuation of taxable

Services in the execution of a works contract (from 01.07.2012) includes Services in the execution of a works contract (from 01.07.2012) includes

the followings :the followings :

(i) labour charges for execution of the works;(i) labour charges for execution of the works;

(ii) amount paid to a sub-contractor for labour and services;(ii) amount paid to a sub-contractor for labour and services;

(iii) charges for planning, designing and architect’s fees;(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used (iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;for the execution of the works contract;

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

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

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

(viii) profit earned by the service provider relatable to supply of labour (viii) profit earned by the service provider relatable to supply of labour and services;and services;

Determination of Value in Works ContractDetermination of Value in Works Contract

Value of service portion in the execution of a works contractValue of service portion in the execution of a works contract

[section 66E(h)] shall be equivalent to the [section 66E(h)] shall be equivalent to the gross amountgross amount

chargedcharged for the works contract less the value of property in for the works contract less the value of property in

goods transferred in the execution of the said works contractgoods transferred in the execution of the said works contract..

Where Where VAT/Sales Tax has been paid or payableVAT/Sales Tax has been paid or payable on the on the actual value of property in goods transferred in the execution actual value of property in goods transferred in the execution of the works contract, such value adopted for the purposes of of the works contract, such value adopted for the purposes of payment of VAT/Sales Tax, shall be taken as the value of payment of VAT/Sales Tax, shall be taken as the value of property in goods transferred in the execution of the said property in goods transferred in the execution of the said works contract for determination of the value of service works contract for determination of the value of service portion in the execution of works contract.portion in the execution of works contract.

Determination of Value of Works Contract Determination of Value of Works Contract in other cases in other cases

Where the value could not been determined as above, the amount Where the value could not been determined as above, the amount of service tax payable shall be :of service tax payable shall be :

Works Contract relating to …..Works Contract relating to ….. Taxable portion as a % Taxable portion as a % of  the total amountof  the total amount

For execution of original works. For execution of original works. “ “original works” means and includes -original works” means and includes - all new constructions, all types of all new constructions, all types of additions and alterations to abandoned or additions and alterations to abandoned or damaged structures to make them damaged structures to make them workable, erection, commissioning or workable, erection, commissioning or installation of plant, machinery or installation of plant, machinery or equipment or structures, whether pre-equipment or structures, whether pre-fabricated or otherwisefabricated or otherwise

40% of total amount 40% of total amount charged for the Works charged for the Works Contract.Contract.( i.e, 12.36% on 40%)( i.e, 12.36% on 40%)

For maintenance or repair or reconditioning For maintenance or repair or reconditioning or restoration or servicing of any goods,or restoration or servicing of any goods,

70% of total amount 70% of total amount charged for the Works charged for the Works ContractContract

For any other contract (other than above) For any other contract (other than above) including maintenance, repair, finishing including maintenance, repair, finishing services like glazing etc., installation of services like glazing etc., installation of electrical fittings etcelectrical fittings etc

60% of total amount 60% of total amount charged for the Works charged for the Works ContractContract

Determination of Value of Works Contract Determination of Value of Works Contract in other cases in other cases

“ “Total Amount”Total Amount” for the contracts shall be the sum total of for the contracts shall be the sum total of gross amount charged plus the gross amount charged plus the fair market valuefair market value of all goods of all goods and services supplied in or in relation to the execution of theand services supplied in or in relation to the execution of the same contract, or any other contract, after deducting the same contract, or any other contract, after deducting the

amount charged for such goods or services and the amount charged for such goods or services and the VAT/Sales Tax levied thereon.VAT/Sales Tax levied thereon.

“ “Fair MarketFair Market” value of goods and services shall be ” value of goods and services shall be

determined in accordance with generally accepted determined in accordance with generally accepted accounting principles.accounting principles.

CENVAT Credit - Works Contract CENVAT Credit - Works Contract Services Services

The Provider of taxable service could not take The Provider of taxable service could not take CENVAT credit of duties/cess paid on any inputs CENVAT credit of duties/cess paid on any inputs used in or in relation to the said works contract. used in or in relation to the said works contract. However, credit in respect of taxes paid on capital However, credit in respect of taxes paid on capital goods and input services shall be available.goods and input services shall be available.

Credit in respect of taxes paid on capital goods and Credit in respect of taxes paid on capital goods and input services shall also be available in those cases input services shall also be available in those cases where taxable value is determined on Specified where taxable value is determined on Specified percentage basis.percentage basis.

Value of Works Contract Value of Works Contract

QuestionQuestion

Would labour contract in relation to building or Would labour contract in relation to building or structure is treated as works contract?structure is treated as works contract?

No. Labour contract do not fall in the definition No. Labour contract do not fall in the definition of works contract. There should be a transfer of of works contract. There should be a transfer of property in goods involved in the execution of property in goods involved in the execution of works scontract which is leviable to VAT. works scontract which is leviable to VAT.

Pure labour contract is not a works contract and Pure labour contract is not a works contract and would be leviable to Service Tax like any other would be leviable to Service Tax like any other service on service on its full value of considerationits full value of consideration..

Value of Works Contract Value of Works Contract

Question :Would contracts for tailoring of clothes or development of photographs also be treated as works contracts as these are also for carrying out a particular work?

No. The phrase used is ‘works contract’ and not work contract. ‘Works’ has a defined and accepted legal meaning. As per Black’s Law dictionary ‘works’ means ‘buildings or structures on land’. Moreover works contract has been defined in the Act

as contract for carrying out specified activity, like construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration etc., or a part thereof in relation to any building or structure on land. Therefore contracts which do not pertain to building or structures on land would be out of the ambit of works contracts ..

Value of Works Contract Value of Works Contract

Question :

Would contracts for construction of a pipe-line or

conduit be covered under works contract?

Yes. As pipeline or conduits are structures on land

contracts for construction of such structure would be

covered under works contract

Value of Works Contract Value of Works Contract

Question :

Would contracts for erection commissioning or

installation of plant, machinery, equipment or

structures, whether prefabricated or otherwise be

treated as a works contract?

Such contracts would be treated as works contracts if –

Transfer of property in goods is involved in such a contract; and

The machinery equipment structures are attached or embedded to earth after erection commissioning or installation.

Value of Works Contract Value of Works Contract

What is the scope of ‘building or structure on land’?

Buildings and structures on land means not only

buildings or structures attached to earth but also things

permanently fastened to a building or structure attached

to earth. Hence covered under Works Contract

Would contracts for painting of a building, repair of

a building, renovation of a building, wall tiling,

flooring be covered under ‘works contract’?

Yes, if such contracts involve provision of materials as

well.

Determination of value of service involved in supply Determination of value of service involved in supply of food or any article of human consumptionof food or any article of human consumption

DDetermination of value of taxable service involved in supply of food and etermination of value of taxable service involved in supply of food and drinks in any restaurant or as outdoor catering. drinks in any restaurant or as outdoor catering.

Total amount” means the sum total of the gross amount charged and the fair Total amount” means the sum total of the gross amount charged and the fair market value of all goods and services supplied in or in relation to the supply of market value of all goods and services supplied in or in relation to the supply of food/drinks whether or not supplied under the same contract or any other food/drinks whether or not supplied under the same contract or any other contract, after deducting therefrom, the amount charged for such goods or contract, after deducting therefrom, the amount charged for such goods or services, if any; and the amount VAT/Sales Tax levied thereonservices, if any; and the amount VAT/Sales Tax levied thereon

DescriptionDescription Taxable portion as a Taxable portion as a % of  the total % of  the total amountamount

Service portion in the supply of food or Service portion in the supply of food or any other article of human consumption any other article of human consumption or any drink (whether or not or any drink (whether or not intoxicating),  at a restaurantintoxicating),  at a restaurant

40%40%

Service portion in outdoor catering Service portion in outdoor catering supply of food or any other article of supply of food or any other article of human consumption or any drink human consumption or any drink (whether or not intoxicating),  (whether or not intoxicating),  

60%60%

VALUATION – INDIVISIBLE CONTRACTSVALUATION – INDIVISIBLE CONTRACTS

1.1. Service Tax is payable on value of services and not Service Tax is payable on value of services and not on the value of the material/input used while on the value of the material/input used while providing serviceproviding service

2.2. Notification no. 12/2003-ST- if amount charged Notification no. 12/2003-ST- if amount charged includes value of goods and material sold, Service includes value of goods and material sold, Service Tax will not be payable on value of such goods and Tax will not be payable on value of such goods and materialmaterial

3.3. In case of AMC, if Sales Tax has been paid on In case of AMC, if Sales Tax has been paid on components and parts, Service Tax would not be components and parts, Service Tax would not be payable on that value. – payable on that value. – ‘Kone Elevators Ltd. Vs. ‘Kone Elevators Ltd. Vs. CST’CST’

VALUATION OF SERVICES VALUATION OF SERVICES

Elements to beElements to be

Included for Included for

Determining Determining

Taxable ValueTaxable Value

VALUATION OF SERVICES – TO INCLUDEVALUATION OF SERVICES – TO INCLUDE

(i) (i) The commission or brokerage charged by a broker on the sale or The commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker;by the stock-broker to any sub-broker;

(ii)  The adjustments made by the telegraph authority from any deposits (ii)  The adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased connection or pager or facsimile or telegraph or telex or for leased circuit;circuit;

(iii)  The amount of premium charged by the insurer from the policy (iii)  The amount of premium charged by the insurer from the policy holder;holder;

(iv)   The commission received by the air travel agent from the airline;(iv)   The commission received by the air travel agent from the airline;(v)    The commission, fee or any other sum received by an actuary, or (v)    The commission, fee or any other sum received by an actuary, or

intermediary or insurance intermediary or insurance agent from the intermediary or insurance intermediary or insurance agent from the insurer;insurer;

(vi)  The reimbursement received by the authorised service station, from (vi)  The reimbursement received by the authorised service station, from manufacturer for carrying out any service of any motor car, light manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such motor vehicle or two wheeled motor vehicle manufactured by such manufacturer;manufacturer;

(vii) The commission or any amount received by the rail travel agent (vii) The commission or any amount received by the rail travel agent from the Railways or the customer;from the Railways or the customer;

VALUATION OF SERVICES – TO INCLUDEVALUATION OF SERVICES – TO INCLUDE

(viii)  The remuneration or commission, by whatever name called, paid to (viii)  The remuneration or commission, by whatever name called, paid to such agent by the client engaging such agent for the services such agent by the client engaging such agent for the services provided by a clearing and forwarding agent to a client rendering provided by a clearing and forwarding agent to a client rendering services of clearing and forwarding operations in any manner; andservices of clearing and forwarding operations in any manner; and

(ix)   The commission, fee or any other sum, by whatever name called, (ix)   The commission, fee or any other sum, by whatever name called, paid to such agent by the insurer appointing such agent in relation to paid to such agent by the insurer appointing such agent in relation to insurance auxiliary services provided by an insurance insurance auxiliary services provided by an insurance agent.Company X provides a taxable service of rent-a-cab by agent.Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The chauffeur providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts expenses and the relevant bills. Company X charges these amounts from the recipients of service. from the recipients of service.

The cost incurred by the chauffeur and billed to the recipient of The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of service constitutes part of gross amount charged for the provision of services by the company X. services by the company X.

SPECIFIC EXCLUSION FROM VALUESPECIFIC EXCLUSION FROM VALUE

1.1. Initial deposit made by the subscriber as the time of Initial deposit made by the subscriber as the time of application for telephone connection or pager or facsimile application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit(FAX) or telegraph or telex or for leased circuit

2.2. The airfare collected by air travel agent in respect of service The airfare collected by air travel agent in respect of service provided by himprovided by him

3.3. The rail fare collected by [rail] travel agent in respect of The rail fare collected by [rail] travel agent in respect of service3 provided by himservice3 provided by him

4.4. Interest on loans, andInterest on loans, and

5.5. The taxes levied by any Government on any passenger The taxes levied by any Government on any passenger travelling by air, if shown separately on the ticket, or the travelling by air, if shown separately on the ticket, or the invoice for such ticket, issued to the passengerinvoice for such ticket, issued to the passenger

OTHER RELEVANT ISSUESOTHER RELEVANT ISSUES

The existing provisions relating to positive list approachThe existing provisions relating to positive list approach of taxing services under sections 65, 65A, 66, and 66A,of taxing services under sections 65, 65A, 66, and 66A, which inter-alia include definition of ‘taxable service’,which inter-alia include definition of ‘taxable service’, classification Reverse charge, [u/s. 66A], shall not beclassification Reverse charge, [u/s. 66A], shall not be applicable from 01.07.2012. (18/2012- 01.06.2012)applicable from 01.07.2012. (18/2012- 01.06.2012)

Newly inserted Section 65B (effective from 01.07.2012)Newly inserted Section 65B (effective from 01.07.2012) provides definitions relating to Service Tax whichprovides definitions relating to Service Tax which inter-alia includes the definition of ‘Service’, ‘Supportinter-alia includes the definition of ‘Service’, ‘Support Service’, ‘Taxable Service’, ‘Negative List’ etc. Service’, ‘Taxable Service’, ‘Negative List’ etc.

[notification no 19/2012 dated 05.06.2012]. [notification no 19/2012 dated 05.06.2012].

Determination of value of servicesDetermination of value of services

In accordance with Rule 3 of the valuation Rules, where the value of servicesIn accordance with Rule 3 of the valuation Rules, where the value of services

is not ascertainable, the same shall be determined in the following manner:is not ascertainable, the same shall be determined in the following manner:

a) a) The value of such taxable service shall be equivalent to the gross amount The value of such taxable service shall be equivalent to the gross amount charged by the service provider for similar service to any other person in charged by the service provider for similar service to any other person in the ordinary course of business where such gross amount is the sole the ordinary course of business where such gross amount is the sole considerationconsideration..

b) b) If the value could not be determined as above, cost of provision of such If the value could not be determined as above, cost of provision of such taxable service would be considered as equivalent money value of such taxable service would be considered as equivalent money value of such services. services.

The value of taxable services shall also include any amount realised asThe value of taxable services shall also include any amount realised as

demurrage or by any other name whatever called for the provision of a demurrage or by any other name whatever called for the provision of a serviceservice

beyond the period originally contracted or in any other manner relatable to beyond the period originally contracted or in any other manner relatable to thethe

provision of service.provision of service.

04/10/23