Conflicts are what make legislation difficult to understand and subject to multiple views. Though we are always seeking for decision from judiciary to guide us in clear manner but the same might come much later than what we expect. There exists conflict for a transaction under various legal frameworks like:
– A software transaction is subject to conflict in Sales tax Vs Service tax Vs Excise.
– A works contract transaction is prone to conflict in Sales tax Vs Service tax
We intend to discuss on a similar conflict between service tax and tax deduction at source. The fact that both the direct and indirect tax framework are involved shall make it more interesting. This one is a slightly different kind of a conflict where one has to determine whether service tax has to be charged on the TDS or vice versa or whether the answer is much more complex than this.
Before we get started with discussion, the terms in introduction section are relevant to be understood.
a. Service tax
This is an indirect tax where the principle liability lies on the service provider but the incidence of the same is passed on to the service recipient.
b. Service tax on import of services
Service tax is an indirect tax as mentioned above and as a general principle the liability to pay service tax lies on the service provider but as per Section 68(2) of Finance Act, 1994 (hereinafter referred as “Act”) read with Rule 2(1)(d) of service tax rules, 1994 in certain cases specifically mentioned therein, there is a reverse charge mechanism whereby the liability to pay service tax is thrust upon the service recipient. One of such cases is when services are imported. This kind of an arrangement is sought for by the Revenue in order to facilitate collections of Service Tax in cases where there might be a possible problem of administration and tracking. Thus in the case of import of services where Revenue would find it rather difficult to track and collect Service Tax from the foreign parties, it becomes much more easy to regulate the same through the Indian service recipient.
c. Tax Deducted at Source (TDS)
The provisions of TDS that are contained in the Income Tax Act, 1961 require the service recipient (for instance) to deduct the income tax which the service provider would be liable to and remit the same to the Revenue. This is just to facilitate the collections of income tax and is in no way a charge on the service recipient. It is to be understood that TDS is also a direct tax as is income tax and in no way the incidence of the same can be transferred to any other person. Hence the service recipient, if he has to pay Rs 100 to a service provider (assuming 20% tax rate for the transaction), then he would pay Rs 80 to the service provider and Rs 20 to the Revenue as TDS (for the time being we do not bring in Service Tax component here). The Rs 20 paid to the Revenue is the income tax payment of the service provider for which a TDS certificate would be made available to him of which credit can be taken. Thus it is only from the payment for the services received that the service recipient makes TDS payment and there is no extra charge to him.
Issues that Arise
a. Whether Service Tax has to be paid only on the payment made to the service provider or on the amount inclusive of the TDS that is remitted to the Revenue?
Say For Example service recipient pays Rs 80 to the service provider and Rs 20 as TDS to the Income tax department on behalf of the service provider. Whether the taxable value shall be Rs 100 or Rs 80 for the purpose of section 67 of governing Act?
b. What would happen in case of import of service from abroad?
In Case of Import of Service, the service recipient is liable to pay service tax as already discussed. So if he is Liable to pay $100 to the service provider and $20 as TDS to the Income tax Department on behalf service provider whether the taxable value shall be $100 or $120?
c. What if the foreign service provider does not take the TDS certificate and the relevant tax credit? Would the position change?
The Proposition that TDS is “additional consideration” for the service provider and shall be charged in gross amount as per valuation provisions holds good only till TDS benefit is available and utilised by the service provider. What shall be the implication when the service provider does not take the TDS credit benefit, whether for this case the value of TDS shall be excluded explicitly? Whether Service tax Calculations needs an amendment in light of Action taken by the assessee at the time of Income tax Assessment?
d. What would be the value of service, where tax rate under DTTA is 10% or 15% or 20%, would it become 110 / 115 /120 for the same service?
It is generally accepted law that DTAA shall be governing framework in case of international transaction. In Case of Import of Service whether the different rate of TDS as per governing treaty shall have a direct effect on valuation of taxable service?
e. Whether tax has to be deducted on the amount inclusive of ST or exclusive?
Also whether the value on which TDS is deductible shall include the service tax component or not? Whether these are interdependent variables in a transaction and computation of service tax and TDS in a single contract is a mathematician’s paradise?
f. Whether there is any obligation to furnish TDS certificate where the tax on the income is required to be borne by service recipient under any agreement?
In a number of cases, the payers (service recipient) of income agree to bear the tax on such income and make payment only `net of tax’ in terms of section 195A of the Income-tax Act whether in such cases can they part away without issuing TDS certificates to the service provider?
Statutory Provisions for Valuation of Taxable Service
Under the service tax law it would be important to consider the valuation provisions in this regard contained in section 67 and the Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as the Rules).
As per section 67, in case where the consideration for the service is in terms of money then service tax shall be charged on the gross amount charged by the service provider for the service provided or to be provided. If the consideration for a taxable service is not wholly or partly in terms of money, then the value of such service shall be such amount in money, with the addition of Service tax charged is equivalent to the consideration.
From this it is clear that any amount charged by the service provider for the services provided would be gross amount and service tax has to be charged on the same. Consideration includes any amount that is payable for the taxable services provided or to be provided. Thus any amount would include any of the costs or expenditure incurred towards provision of taxable service, profits, etc.
The Question of inclusion or exclusion of tax deducted at source from the value of taxable service has been a subject matter of big debate resulting in different Interpretations and conflicting judicial decisions.
Section 67 of the Act provides as follows: –
“Where Service Tax is chargeable on any taxable service with reference to its value, then such value shall, in 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 “.
From the above provision some very significant interpretations can be carved:-
- The amount should be charged by the service provider himself
- The amount shall be charged for the service provided or to be provided.
The amount which is charged by any other entity (whether statutory or other) shall not be a part of gross amount charged by the service provider unless specifically stated in legal provisions. In Case of TDS also the charge is not created by the Service provider but by the statutory authority and shall not be includable in the valuation of taxable service unless explicitly stated in legal provisions.
The above view can be supported from four arguments:
- From various departmental clarifications (as stated below),it is clear that the department had consistently held that if the charge is created by another authority or Government, the same cannot form a part of the value of taxable services, as can be seen from the following examples: –
|Cable Operators;||Entertainment Tax collected and paid to the Government will not be included in the value of taxable service in the value of taxable service.||F.No.Bll/l/2002-TRU dated 1.8.02|
|Renting of Immoveable Property||Property Tax excluded from the value of taxable services.||Notification 24/2007-ST dated 22.5.07|
|Works Contract Services.||Value Added Tax to be excluded from the value of taxable services||Rule 2A of Service Tax (Determination of Value) Rules, 2006|
- Secondly, In the case of Punjab Ex-Servicemen Corp. Vs Comm. of C. Ex., Chandigarh [2009 (13) S.T.R. 529 (Tri. – Del.)] the CESTAT, referred to a circular issued by the CBEC with regard to ‘security agency’s services’ which specified that: “Abatement in respect of statutory levies and taxes can be granted provided the same has some direct relation with the services rendered to the client and is hence specifically billed to the client and is reimbursable by the client on an actual basis.
- Thirdly, Even in Case of Import of Service (as discussed later) the keyword as per Rule 7(1) and Rule 7(2) of Service tax Rules,1994 are “actual consideration charged for the services provided” and “total consideration paid … for the services rendered” respectively. It is very important to highlight the fact that it is categorical in that ‘consideration’ shall be what is to be ‘paid’ to the non-resident. Since not explicitly mentioned the consideration not paid to the party shall not be subject to service tax.
- Fourthly, As per section 195A of the Income-tax Act, which provides that where under any agreement/arrangement, the tax chargeable on any income is borne by the payer of the income, then, for the purpose of deduction of tax at source, such income shall be increased to such an amount as would after deduction of tax thereon, be equal to the net amount payable under the agreement. Therefore “Grossing up of Income” is as a result of the specific provisions under the Income Tax Act. It is doubtful whether this can be automatically extended to Service Tax in the absence of specific provisions permitting such “Grossing up” under the Service Tax provisions.
Though it must be said that the tax deducted at source shall be paid by service recipient on behalf of service provider and the nature being that of direct tax the incidence cannot be passed on. Hence, it can be said that TDS amounts to “additional consideration” paid to service provider but as discussed above unless the same is explicitly stated as such in valuation provision TDS shall not be subject matter of service tax valuation.
Import of Service is governed by Section 66A which provides a separate mechanism for levying service tax on services received from outside India. Section 66A is to be read with the Taxation of Services (Provided from outside India and Received in India) Rules, 2006. It may be noted that only service received in India are taxable under these provisions. The Valuation of Such services shall be governed by Rule 7 of Service tax Rules. Rule 7 States that:
7.(1) The value of taxable service received under the provisions of section 66A (i.e. the services which are provided from outside India and received in India) shall be such amount as is equal to the actual consideration charged for the services provided or to be provided.
7. (2) The value of taxable services
- which are partly performed in India and are
- specified in clause (ii) of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006,
shall be the total consideration paid by the recipient for such services including the value of service partly performed outside India.
For Example:– Lets say a Indian Service recipient (Party A) enters into contract with foreign service provider (Party B) for Import of Consultancy service. The terms state the contract value to $100 and TDS of $20 is to be borne by Party A. Now in Order to Value the imported service lets apply the above rules.
As per Rule 7(1) the actual consideration charged for the services provided or to be provided is $100 and Rule 7(2) total consideration paid by the recipient is also $100. Since there are no deeming fictions and explicit statement adding TDS to the amount shall not be apt.
Department and Judiciary’s Multiple Views
Department’s Take: – As per the Frequently Asked Question (FAQ) on Service Tax, issued by Directorate General of Service Tax and more Specifically Question 3.12 states that income tax deducted at source shall be includable in gross amount and it is also his submission that the Service Tax is payable on the gross amount including the amount of income tax deducted at source.
Salim & Associates Vs. CCE, Calicut – 2007 (7) STR 48 (Tri. Bang.) 2007-IST-257-CESTAT-BANG) ; Commissioner of Central Excise, Jaipur Vs. Louis Berger International Inc. – 2009 (13) STR 381 (Tri.-Del.) = ( 2008-IST-463-CESTAT-DEL) and Cosmos Detective & Security Services Vs. CCE, Ahmedabad – 2010 (195) STR 414 (Tribunal.-Ahmd.) = (2010-IST-44-CESTAT-AHM) –it was held that the TDS amount deducted was payable only on behalf of assessee to Income-tax Department and that there was no justification to exclude the said amount from gross amount for purpose of determining service tax.
While in the Recent most Judgement in case of M/s Sheladia Rites (JV) Vs Additional Commissioner of Central Excise (decision dated 6th of December, 2010) it was HELD by Bangalore tribunal against the department’s submission that (after considering above submission in support of department):
“We find that the includability of an amount paid as Income Tax by service recipient needs to be considered in detail. It is not disputed in the show cause notice as well as in Order-in-Original that the applicant has discharged Service Tax liabilities on the amount of bills raised by him for the services rendered as per the contract. The issue of includability of income tax paid by service recipient in the gross amount is an arguable one, which needs to be gone into detail. In our considered view, since the issue being debatable, it can be heard in detail at the time of final disposal of the appeal. At this juncture, prima facie, we are of the considered view that the applicant need not be put to any condition. In view of this, the application for waiver of pre-deposit of the amounts (for amount of Service tax only on TDS Portion) involved is stayed and recovery is stayed till the disposal of the appeal.” (Modified Contextually)
Also in the case of T.V.S. MOTOR COMPANY LTD. V COMMISSIONER OF C. EX., CHENNAI 2009 (16) S.T.R. 729 (Tri. – Chennai) it was held that prima facie there is force in appellant’s contention that provision for grossing up of amount under Section 195A of Income Tax Act, 1961 applicable for computing income tax and not Service tax and pre-deposit was waived off.
If the foreign service provider does not take credit of the tax mentioned in the TDS certificate then such an act cannot change the fact that Service Tax be charged on a particular amount or not. In Light of our above conclusion that Service tax shall not include the value of tax deducted at source under section 195A of Income tax Act, Practically, whether the tax credit is availed or not shall have no bearing on the service tax liability of the assessee.
As per Section 90(2) of the Income Tax Act:-
“Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee”.
For example, say, as per provisions of income tax act, the applicable rate of TDS under Income tax provisions is 10% and the rate as per governing treaty with that country is 15% for similar transactions. In this case of conflict, following the above law, rate of treaty shall be redundant to the extent that they create additional burden on the assessee. Hence, the applicable rate of deduction shall be 10%. So it is important to understand that the increased rates in DTAA shall have no significance with respect to the valuation of taxable service.
From the above law, it is very clear then when the rates as per DTAA shall be 10%/15%/20% there shall be no implications in effective rates of TDS if the rates as per Chapter XVII are less or equal.
In this regard following is CBDT’s viewpoint:-
- CBDT circular 4/2008 dated. 28.04.2008 – This circular states that a tenant is not required to deduct tax on the amount of service tax paid/payable on the rent due to the reason that the ST would in no way be the ‘income’ of the landlord as is envisaged in the definition of rent.
- Replying to the Bombay Chamber of Commerce & Industry’s letter, the CBDT vide its Letter F. No. 275/73/2007-IT(B), dated June 30, 2008 had clarified that the Board had decided to exclude TDS on service tax component on rental payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since section 194J (payment for technical and professional fees) covers “any sum paid, therefore, the board has decided not to extend the scope of Circular No. 4/2008, dated April 28, 2008 to such payment under section 194J.
Our Viewpoint on above Circular
In our View “CBDT states that as Section 194-I requires deduction on income & service tax does not form part of income, thus TDS is not deductible on service tax. While in case of 194-J CBDT lays stress on “any sum payable” & forgets the part “by way of professional fee, fee for technical services, royalty & non compete fee.” Service tax shall not form part of professional fee, it is over and above the professional fee which the service provider has to collect from the service recipient & pay to government. Thus it is not part of “any sum payable by way of professional fee”.
As per the CBDT in the case of technical and professional fees, tax has to be deducted on the service tax portion as well and as per the provisions of service tax, Service Tax has to be deducted on TDS Assessees will thus have to solve a set of simultaneous equations if they have to satisfy both the above i.e. pay Service Tax on TDS and pay TDS on Service Tax. This simple is our system of taxation where indirect tax and direct tax payments are so linked that we need experts to form equations and solve the same. There now seems to be a lot of work for the mathematicians as well in addition to CA’s and advocates in the field of Indian taxation.
In this connection the CBDT has issued Circular No: 785 dated 24-11-1999:
“Any sum deducted in accordance with the provisions of Chapter XVII of the Income-tax Act is deemed to be the income of the payee as per section 198 of the Income-tax Act. Further, section 199 of the Act provides that credit for the tax deducted at source and paid to the Central Government shall be given to the person from whose income the deduction was made on the production of certificate furnished under section 203 of the Income-tax Act. Section 203 of the Act requires that every person deducting tax at source shall furnish to the payee a certificate in the prescribed form within the prescribed time.
Thus payer is under legal obligation to furnish a certificate for the tax deducted at source in the prescribed form to the payee within the time prescribed as per section 203 of the Income-tax Act, 1961”.
I would end by Saying, that in order to clarify this issue and reduce litigation, especially in case of import of services from outside India, there must be a Board Notification/circular issued which would clarify rather than to complicate it further.
About the Authors:
Co-Author, Shri Rakesh Chitkara, is practicing Advocate in New Delhi and specialising in Service Tax.
Co-Author, Ankit Gulgulia, is practicing Chartered Accountant in New Delhi and specialising in Indirect Taxes, Corporate Laws and Management Advisory. He can be reached at +91-9811653975 or Ankitgulgulia@gmail.com.
Co-Author, Ms. Shilpy Jain, is Chartered Accountant.
DISCLAIMER: This article is provided purely for your information only and you should check other information sources before taking any action based on any of the content in this article. Neither the authors nor website hosting the article make any warranty as to the quality or currency of the information contained in any of the site’s articles.