Valuation of Services

under

Service Tax__________________________________________________________________

Keshav Garg

(B. Com, CA, CS, ISA(ICAI)

+91 9888-090-008

Mygst.mytax@gmail.com

servicetaxindia@outlook.com

Charging Provision of Service Tax (Sec 66B)

There shall be levied a tax at the rateof fourteen percent on value of allservices, other than those specified inthe negative list, provided or agreedto be provided in the taxableterritory by one person to anotherand collected in such manner asmay be prescribed.

Analysis of Charging Provision

1. Unlike Section 3 of Central Excise Act 1944, the verycharging section of service tax includes reference tovalue of services.

2. If there is NO value, NO Service Tax can be charged.

3. Since the rate of charge and value both form part ofcharging section, other provisions like abatement,composition etc. are optional.

4. By any other provision charge of service tax cannotexceed the rate mentioned in the charging provisions.

5. Section 67 of Finance Act 1994 read with Service Tax(Determination of Value) Rules 2006 deal withprinciples of valuation of taxable services.

Valuation Scheme u/s 67(1)

Situation Valuation

1. Where the provision of service is

for a consideration in money

Gross Amount Charged by

the service provider for

such service provided or to

be provided by him.

2. Where the provision of service is

for a consideration not wholly or

partly consisting of money.

Such Amount in MONEY,

with the addition of service

tax charged, as is

equivalent to the

consideration.

3. Where the provision of service is

for a consideration which is not

ascertainable.

The amount as may be

determined in the

prescribed manner.

Other Provisions of Section 67.

1. Section 67(2) allows the assessee to calculate servicetax based on reverse working in a situation where inthe amount is inclusive of service tax. For instance:

2. Gross Amount as per Section 67(3) includes anyamount received towards the taxable service before,during or after provision of such service.

Gross Amount Charged (inclusive of

Service Tax)

INR 150,000/-

Service Tax Component on above would be:

150,000 X 14.5/114.5

INR 18,995/-

Summary of Valuation (Section 67)

Valuation

Wholly in Money

Gross Amount Charged

No Notional Values

Wholly or Partly in Money

Equivalent Money

Consideration

Not Ascertainable

Value of services provided to third

party

Market Value as determined, not lower than cost.

Where consideration is

NO Notional Value to be adopted

1. In order to call an activity as Service, consideration mustbe charged. Any activity without the consideration willNOT qualify as service as per definition u/s 65B(44) .

2. In Kiran Motors Limited v/s CCE 2009 (16) STR 74(Ahmd. Trib) held that where services are provided freeof cost, there could be no levy towards service tax. NoNotional values can be triggered in such cases.

3. If the service is provided at a value which is lower thanmarket value or MRP, service tax can be demanded onlyon amount actually charged and not on Gross MRP.

4. Service Tax cannot be demanded on discounts offered atthe time of entering the contract.

5. If it cannot be proved that security deposits areinfluencing the consideration, the same cannot be broughtunder charge of service tax. Magarpatta Township v/sCCE 2014 (33) STR 53 (Tri-Mumbai)

Taxation of Gross Amount

1. As per Rule 5(1) of Service Tax (Determination of Value)Rules 2006, any expenditure or costs incurred by theservice provider in the course of providing taxableservice, all such expenses shall be treated asconsideration for the taxable services and shall beincluded in the value for purpose of charging service tax.

2. Discounts/Commissions passed on to the customerscannot be reduced from the value of taxable services.

3. Even where the exact amount of cost incurred is chargedto the customers, service tax is still applicable. But incase the services are subsidized, service tax is applicableonly on the subsidized value. West Coast Paper Millsv/s CCE 2009 (16) STR 627 (Bang. Tribunal)

Valuation of Non Monetary Consideration Section 67(1)(ii)

1. In case of Non Monetary Consideration theequivalent Market value shall be the value ofservice. Such market value shall be deemed toinclude the service tax charge and thereforereverse calculation as per section 67(2) shallbe done.

2. “Consideration” means everything received orrecoverable in return for a provision of serviceswhich include monetary payments, nonmonetary payments, as well as deferredpayments.

Valuation in case the consideration is not ascertainable (Sec 67(1)(iii)

1. Valuation shall be done as per the provisions of Service Tax(Determination of Value) Rules, 2006.

2. Such situations usually arises in case of embeddedconsideration where the consideration for services isembedded with the consideration of goods.

3. Rules provide for valuation in respect of following situations:

a)Determining service component in works contract.

b)Service in relation to money changing.

c) Service component in supply of food items

d) Determination of value where such value is notascertainable.

Service Tax (Determination of Value) Rules 2006

1. Where the value of service is not ascertainable (Rule 3):

a) the value shall be the gross amount charged by theservice provider to provide similar service to any otherperson and gross amount charged is the soleconsideration.

b) Where the value cannot be determined as per clause(a), the cost of provision of such service shall bedeemed to be the value of such service.

2. In case of net of tax payments contracts the amount hasto be grossed up for charging of service Tax:

Net of Tax Payment (after TDS) INR 100,000/-

Gross Amount (Before TDS)

100,000 X 100/90

INR 111,111/-

Valuation for Service Tax (Rule 7) INR 111,111/-

Reimbursement of Expenses

1. The use of word “such” in the valuation provisionsimplies that tax can be charged only on the amountcharged for service and not on any other item.

2. Circumstances under which the claim of reimbursementof expenses is permissible :

a) Pure Agent Basis

b) Neither Intends to hold nor holds any title in goods andservices procured.

c) Does not use such goods/services so procured.

d) Receives only the actual amount incurred to procuresuch goods/services.

3. If the expenses are intricately connected with andinseparable part of the services rendered, then no claimof reimbursement of expenses can be made.

4. If the liability of an expense is of service provider and the same isreimbursed by the service recipient, it cannot be classified asreimbursement of expenses.

5. In Idea Mobile Communications Ltd. v/s CCE 2011 (23) STR0433 (SC) it was held that during the course of rendition oftelecommunication services, SIM Card has no intrinsic value andtherefore has to be treated as service.

6. In Intercontinental Consultants and Technocrafts PrivateLimited v/s UOI 2013 (29) STR 9 (Del. HC) rule 5 has beenheld unconstitutional. It held that expenditures incurred forprovision of services should not be included in valuation of service.It held that such rule is ultravires to Section 67.

7. Thereafter Finance Act 2015 amended the explanation to section67 and specifically inserted that consideration shall include anyreimbursable expenditure or cost incurred by the service providerand charged, in the course of providing the service except in somespecified circumstances.

8. The law has amended the term “consideration” and not “grossamount Charged” under section 67 and therefore even afteramendment the Delhi High Court judgement will stand good.

Valuation of Service Portion in Composite Contracts

1. Service Tax (Determination of Value) Rules 2006, provide for valuation of service component of a composite contract.

Situation Rule

Applicable

Service Component in Works Contract 2A

Service Component in Food Supply 2C

Service Component in Money changing 2B

Valuation of Works Contract

Value of Service

Cannot be Determined

Execution of Original Works

Contract

40% of total

amount

Maintenance/Repair

70% of total

amount

Other works

contract

70% (60% up to 30.09.2014)

Can be determined

Gross – Value of Material

Determination of Service Component in Food Supply (Rule 2C)

Supply of Food as part of service Rates

Applicable

In a restaurant 40%

As a part of outdoor catering 60%

1. In case of an outdoor caterer, it was held that cost of LPG

cylinders supplied free of cost is not includible in the value of

taxable services. P. Srinivasan v/s CCE 2014 (33) STR 652

(Tribunal Chennai).

What do we mean by “total amount”?

1. As per Explanation (II) to clause (ii) of rule 2A of the “totalamount” would be the sum total of Gross Amount Charged forthe works contract and the fair market value of all goods andservices supplied in or in relation to works contract , Less:

a) Amount charged for such goods/services provided by servicereceiver.

b) The Value Added Tax or Sales Tax, if any.

2. Completion and Finishing services has to be classified asoriginal works since they relate to an incomplete or unfinishedbuilding or civil structure. Carpenters v/s CCE 2014(33) STR573 (Tri- Mumbai).

3. In case of free issued material, whose consideration has not beencharged to the customer, the same cannot be added into servicetax calculation mechanism. Bhayana Builders (P) Ltd. v/sCommissioner of ST Delhi (2013) (32) STR 49 (Tri)

Determining the value of service in relation to Money Changing

1. Definition of Service u/s 65B(44) specifically excluded theactivities undertaken only in money from the purview ofservice tax. But any exchange of currency for aconsideration shall be chargeable to tax as prescribed inrule 2B.

2. The value of Taxable service shall be the differencebetween the buying rate/selling rate and the RBIreference rate for that currency.

3. If RBI reference rate is not available then the value shallbe 1% of the gross amount in Indian Rupees provided orreceived by the person changing the money.

4. If Foreign Currency is exchanged for another foreigncurrency, the value of taxable service shall be equal to 1%of the lesser of the two amounts the person changingthe money would have received by converting thecurrencies into Indian Rupees at the Reference Rateprovided by RBI.

Penalties under Service Tax

Brief on Penalties under law

Nature of Penalty Section Offence/Default

1. Deprivation of Revenue 76 Penalty for failure to

pay service tax

2. Non Compliance of Law 77 Penalty for

contravention of rules

and provisions of the

Act

3. Deprivation of Revenue 78 Penalty for

suppressing etc. the

value of taxable

services.

4. Non Compliance 78A Personal Penalty

Procedure for levying Penalty.

1. Show Cause Notice (SCN) is a must if the departmentwants to levy penalty under the law. Imposition ofpenalty without SCN violates the principles of naturaljustice. Ashwani and Associates v/s CCE 2006 (2)STR 289 (Del. Trib).

2. Penalty can be imposed only under the provisions whichare in existence at the time of issue of SCN even thoughthe offence was committed before. West MinisterInternational Private Limited v/s CCE 140 ELT 244(Del).

3. As per section 73(3), where the service tax along withinterest has been paid before the issue of SCN and dulyintimated to the department, No SCN can be served.

4. Circular No 137/167/2006-CX.4 dated 03/10/2007 clarifiedthat section 73(3), provides for the conclusion ofadjudication proceedings on payment of service tax andinterest and that not only adjudication proceedings butalso penalty proceedings stand concluded.

Case laws where the penalty proceedings have been dropped on

submission of service tax along with interest.

1. Esskay Shipping (P) Ltd. (Banglore Trib) 2014(34) STR 235

2. Calderys India Refractories 2014(36) STR 102(Tri- Mumbai)

3. Sagar Enterprises 2010 (18) STR 212 (Tri-Ahmedabad)

4. Machino Basel India Limited 2011 (273) ELT53 (P & H HC)

5. Vinayaka Travels 2011 (23) STR (KarnatakaHC)

Amended Sections of Penalty(.w.e.f. – 14.05.2015)

Section No. Old Provision New Provision

76 (No Fraud)

& 78 (Fraud)

100 Rs per day or 1%

per month from date of

default. Maximum

Penalty was barred at

50% of Service Tax

Liability

Non discretionary Minimum Penalty.

-- Fraud – 100 %

-- others– 10%

No such Waiver –

except reasonable cause

as mentioned in Section

80.

Complete Waiver of Penalty if ST along

with Interest is paid within 30 days of date

of service of notice.

In case of fraud, penalty can be reduced up

to 15% if reduced penalty + Intt +

Service Tax is paid within 30 days of

notice.

Only 25 % of penalty has to be paid if the ST

+ Intt. is paid within 30 days of order. In

case of fraud penalty also has to be paid.

Different Scenarios in Penalty Provisions from 14.05.2015

Situation Applicable Provisions

SCN issued after 14.05.2015 New Sections 76 and 78 shall

apply.

SCN issued before 14.05.2015 but

order passed thereafter

New Sections 76 and 78 as laid

down by transitory provision of

section 78B.

Order in original issued before

14.05.2015

Old sections 76 and 78 subject to

reasonable clause u/s 80.

THANK YOUKindly Give your reviews and suggestions about the session :

CA. Keshav GargPh. & WhatsApp : +91-9888-090-008E-mail: servicetaxindia@outlook.com

mygst.mytax@gmail.com

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