SBI Cards & Payment Services Private Limited Vs Commissioner of Central Excise And Central Goods & Service Tax (CESTAT Chandigarh)
The appeal challenged the order dated 20.04.2020 passed by the Commissioner of CGST, Rohtak confirming service tax demands of ₹4,26,41,080 in respect of services received from VISA Worldwide International PTE Ltd. and ₹5,30,197 in respect of services received from MasterCard Asia Pacific PTE Ltd., together with interest and penalties. The appellant, engaged in providing credit card services, had availed credit card settlement services from these overseas entities and deposited withholding tax (WHT) on payments made for such services.
The Tribunal noted that the contractual arrangements with VISA and MasterCard were materially different. Under the MasterCard agreement, WHT paid by the appellant was not reimbursable, and the appellant had discharged service tax on the grossed-up consideration from 01.04.2013 onwards, except for the period 01.07.2012 to 31.03.2013. Under the VISA agreement, however, the appellant furnished proof of WHT payment and VISA periodically reimbursed the WHT. The WHT amount was reflected as recoverable in the appellant’s books and adjusted upon reimbursement, with the burden of WHT ultimately not being borne by the appellant.
Following investigation by the DGCEI, Chennai, a show cause notice alleged that WHT formed part of the taxable value for service tax under the reverse charge mechanism. The appellant contended that WHT reimbursed by VISA did not constitute consideration under Section 67 of the Finance Act, 1994, since the invoices issued by VISA and MasterCard did not charge WHT as consideration for services. It further submitted that reimbursable expenditure did not form part of consideration, particularly where reimbursement was contractually provided. In the alternative, it claimed adjustment under Rule 6(3) of the Service Tax Rules, 1994, asserted that the demand was revenue neutral, challenged invocation of the extended limitation period, and opposed imposition of penalties, stating that it had regularly filed ST-3 returns and entertained a bona fide belief regarding taxability.
The Revenue argued that WHT paid on behalf of VISA and MasterCard constituted indirect consideration for the services received and therefore formed part of the taxable value under Section 67 of the Finance Act, 1994 and Rule 7 of the Point of Taxation Rules, 2011. It relied on the agreements, accounting treatment of WHT as expenditure, statements recorded during investigation, and contended that the appellant’s payment of service tax on grossed-up value during some periods but not others demonstrated that no interpretational issue existed. It further maintained that the extended period, interest and penalties had been correctly invoked.
The Tribunal examined Section 67 of the Finance Act, 1994 and distinguished the two agreements. It found that under the MasterCard agreement the WHT was not reimbursable and therefore the entire grossed-up amount constituted consideration paid to MasterCard. The appellant had accordingly discharged service tax on the correct value. In contrast, under the VISA agreement the WHT was contractually reimbursable upon production of proof of payment, and the reimbursed amount flowed back to the appellant. The Tribunal held that this reimbursable WHT did not form part of the consideration for services received from VISA.
The Tribunal relied upon Commissioner of Service Tax v. Bhayana Builders (P) Ltd. and Intercontinental Consultants and Technocrats Pvt. Ltd., observing that only the amount charged as consideration for the taxable service forms part of the assessable value and that any amount having no nexus with the taxable service cannot be included. It also referred to Magarpatta Township Development and Construction Co. Ltd., TVS Motor Co. Ltd., and ITD Cem Joint Venture, which emphasised that service tax is payable on the actual consideration charged and that tax deducted at source paid to comply with statutory obligations does not by itself become consideration for the service. The Tribunal distinguished Sheladia Rites on facts, observing that the present case involved two different contractual arrangements requiring different treatment.
Regarding the service tax of ₹5,30,197 relating to the period July 2012 to March 2013, the Tribunal noted that the amount had been paid by the appellant before issuance of the show cause notice. It further found that the issue had subsequently been settled through a series of Tribunal decisions, that the appellant could have entertained a bona fide belief regarding taxability, that the Revenue had not produced evidence of suppression or intent to evade tax, and that the appellant had regularly filed ST-3 returns. The Tribunal therefore held that the extended period of limitation was not invocable and that no penalties were sustainable. Relying on Shyam Spectra, following the Calcutta High Court decision in Infinity Infotech Parks, it observed that once the demand for the extended period failed, the demand for the normal period also could not survive.
Accordingly, the Tribunal allowed the appeal.
Cases Discussed
- ITD Cem Joint Venture, Final Order No. 60027/2024 dated 30.01.2024
- Schneider Electric India Pvt. Ltd. Versus Commissioner of Service Tax, Delhi and Commissioner of Service Tax, Delhi Versus Schneider Electric India Pvt. Ltd., 2023 (6) TMI 1198 – CESTAT Chandigarh
- FCI Oen Connectors Ltd Versus Commissioner of Central Tax, Cochin, 2023 (10) TMI 1217 – CESTAT Bangalore
- M/s VSL India Private Limited, 2023 (3) TMI 802 – CESTAT Chennai
- NCR Corporation India Pvt. Ltd. Versus Commr. Of C.T., Bangalore North, 2021 (55) G.S.T.L. 6 (Tri. – Bang.)
- V.S. Motor Company Ltd. Versus Commr. Of C. Ex. & S.T., Chennai-III Commissionerate, 2021 (55) G.S.T.L. 459 (Tri. – Chennai)
- M/s Indian Additives Ltd., 2021 (10) TMI 487 – CESTAT Chennai
- M/S. Goldman Sachs Services Versus Commissioner of Central Tax, Bengaluru East, [2022] 97 G.S.T.R. 315 (CESTAT – Bang)
- Hindustan Oil Exploration Co. Ltd. vs. Commissioner of GST & CE, 2019 (25) G.S.T.L. 252 (Tri. – Chennai)
- Sheladia Rites, 2019 (27) GSTL 707 (Tri. Hyd.)
- Commr. of Service Tax Vs Bhayana Builders (P) Ltd. (Supreme Court), 2018 (10) GSTL 118 (SC)
- Intercontinental Consultants and Technocrats Pvt. Ltd. (Supreme Court), 2018 (10) GSTL 401 (SC)
- Centre For High Technology Versus C.S.T. – Service Tax – Delhi, 2018 (8) TMI 243 – CESTAT New Delhi
- Magarpatta Township Development and Construction Co. Ltd. vs. CCE, Pune-III, 2016 (43) S.T.R. 132 (Tri. – Mumbai)
- Infinity Infotech Parks (Calcutta High Court), 2014 (36) S.T.R. 37 (Cal.)
FULL TEXT OF THE CESTAT CHANDIGARH ORDER
The present appeal is directed against the impugned order dated 20.04.2020 passed by the Commissioner of CGST, Rohtak.
2.1 Briefly stated facts of the case are that the appellant M/s SBI Cards & Payment Services Private Limited are engaged in the business of providing credit card services; the appellant availed credit card settlement services from networks like VISA Worldwide International PTE Ltd (in short “VISA”) and MasterCard Asia Pacific PTE Ltd (in short “MasterCard”); the appellant entered into the agreements with overseas service providers; as per the agreements, the overseas service providers charged an amount on a pre-defined timeline by auto debiting the bank account of the appellant; the appellant used to deposit withholding tax (in short “WHT”) on the amount paid during a particular month for the charges.
2.2 In respect of agreement with MasterCard, the appellants were charging WHT @6% on the association charges on a gross-up basis and the grossed-up rate worked out @6.38%; the appellant paid the WHT @6% for the period 2012-13 to 2016-17; M/s MasterCard have not reimbursed such WHT to the appellants. In respect of MasterCard, the appellants have paid service tax on grossed up basis on the Consideration paid from the period 01.04.2013 onwards; however, they did not pay service tax on grossed up basis for the period 01.07.2012 to 31.03.2013. In respect of VISA, the appellants paid service tax on grossed up basis on the Consideration received for the period April 2013 to November 2013; April 2014 to July 2014; April 2015 to May 2015; however, they did not discharged service tax for the period July 2012 to March 2013; December 2013 to March 2014; August 2014 to March 2015 and June 2015 to June 2017.
2.3 In respect of agreement with VISA, the appellant were required to furnish the proof of payment of WHT; VISA used to issue periodical letters to the appellant to reimburse the said amount on a quarterly basis on submission of proof of deposit of WHT; the amount of WHT paid by the appellant was shown as recoverable in the books of accounts of the appellant; the same was nullified as the appellant used to adjust the recoverable account by such reimbursement; the burden of WHT was never borne by the appellant and the same was reimbursed by VISA to the appellant. In the case of VISA, for the period 2012-13 the WHT was deposited by the appellant @10.50% on grossed-up basis for which the grossed-up rate worked out @11.74% and for the period 2013-14 to 2016-17, the WHT was deposited by the appellant @10% on grossed-up basis for which the grossed-up rate worked out @11.11%.
2.4 An investigation was conducted by the DGCEI, Chennai and on the basis of the investigation, a show cause notice was issued to the appellant proposing the demand of service tax of Rs.4,26,41,080/- in respect of services received from VISA and demand of service tax of Rs.5,30,197/- in respect of services received from MasterCard alongwith interest and penalties. The proposals in the show cause notice were confirmed by the impugned order dated 20.04.2020; hence, the present appeal.
3. Shri B.L. Narasimhan, learned Counsel for the appellants, submits that demand of service tax on WHT charges is not sustainable as the same does not form a part of the consideration paid for receiving services from VISA; as per Section 67 of the Finance Act, 1994, taxable value in case of provision of service for a consideration in money, shall be the gross amount charged by the service provider; “Gross Amount Charged” has been defined as any payment made by a person, including by debit or credit entries; the understanding is made clear by the definition of “Consideration”; in the impugned case, amount charged is exclusive of withholding tax, which is evidenced by the invoices issued by MasterCard/ VISA; as the WHT is not charged by them, it cannot be treated as a “Consideration” for the purpose of providing the service. He relies on the following cases:
- Magarpatta Township Development and Construction Co. Ltd. vs. CCE, Pune-III -2016 (43) S.T.R. 132 (Tri. – Mumbai)
- Hindustan Oil Exploration Co. Ltd. vs. Commissioner of GST & CE – 2019 (25) G.S.T.L. 252 (Tri. – Chennai)
- V.S. Motor Company Ltd. Versus Commr. Of C. Ex. & S.T., Chennai-III Commissionerate 2021 (55) G.S.T.L. 459 (Tri. – Chennai)
- FCI Oen Connectors Ltd Versus Commissioner of Central Tax, Cochin 2023 (10) TMI 1217-CESTAT Bangalore
- Centre For High Technology Versus C.S.T. -Service Tax – Delhi 2018 (8) TMI 243 – CESTAT New Delhi
4. Learned Counsel for the appellants further submits that reimbursable expenditure does not form part of consideration for the period 13.05.2015; in terms of the Agreement with VISA, the WHT paid by the appellant is reimbursable by VISA on periodical basis; it has been held in the case of Intercontinental Consultants and Technocrats Ltd. – 2018 (10) GSTL 401 (SC); therefore, in any case, demand of service tax on WHT paid in respect of services rendered by VISA is liable to be set aside for the period prior to 13.05.2015. He submits that the definition of “Consideration” was amended w.e.f. 13.05.2015; as per the amended definition, the reimbursable expenditure incurred by the service provider was also brought under the definition of “Consideration”; however, it is pertinent to note that only those reimbursable expenditure, which are charged in the course of providing a taxable service are to be included in the “Consideration”; in the instant case, the WHT was not paid and reimbursed in the course of providing a taxable service; the same is paid in compliance of Section 195 of the Income Tax Act, 1961; moreover, the WHT was not an amount charged by the service providers in the course of services provided and therefore, not includable in the “Consideration” as held in M/s Indian Additives Ltd. – 2021 (10) TMI 487- CESTAT Chennai and M/s VSL India Private Limited – 2023 (3) TMI 802- CESTAT Chennai.
5. Learned Counsel submits, without prejudice to the above, that the appellant is entitled to claim adjustment of the amount received from VISA under Rule 6(3) of Service Tax Rules, 1994. He further submits that the entire demand is revenue neutral as the appellant is entitled to claim the service tax, if paid, as an input service. He submits also that the Show Cause Notice covering the period July 2012 to June 2017 issued on 25.04.2018 is time barred; neither the SCN nor the OM bring out any evidence to show any positive act or suppression on part of the appellant; moreover, the appellant was under bona fide belief that WHT paid by them does not form part of the “Consideration” for the purposes of payment of service tax. He submits that extended period cannot be invoked. As the demand issued under Section 73 is not sustainable, there is no question of imposition of penalty; as the appellant was regularly filing the Returns, penalty under Section 77 cannot be imposed; the appellants are entitled to waiver of penalty under Section 80. He relies on the following cases:
- NCR Corporation India Pvt. Ltd. Versus Commr. Of C.T., Bangalore North 2021 (55) G.S.T.L. 6 (Tri. – Bang.) –
- M/S. Goldman Sachs Services Versus Commissioner of Central Tax, Bengaluru East [2022] 97 G S.T.R. 315 (CESTAT – Bang)
- Schneider Electric India Pvt. Ltd. Versus Commissioner of Service Tax, Delhi and Commissioner of Service Tax, Delhi Versus Schneider Electric India Pvt. Ltd. 2023 (6) TMI 1198 – CESTAT Chandigarh.
6. Learned Authorized Representative for the Department takes us through various clauses of the Agreement, relevant provision of Section 67 and submits that as per the invoice issued by VISA, they have charged for the services rendered by them and the appellant has borne the TDS (WHT amount) on behalf of VISA @ 10% of the gross value; the amount is claimed as reimbursement from the overseas service provider. He submits that as per invoice issued by MasterCard; the appellant had borne and paid the TDS on behalf of MasterCard. He submits that on going through the License Agreement with MasterCard, it appears that the appellants agreed to pay all taxes that might be charged and payment shall be made to the appellants without deduction for any such taxes; the appellants have booked the TDS amount paid by them, on behalf of VISA/ MasterCard, under expenses in the general ledger; it is an evidence to show that the appellants have incurred these expenses and therefore are liable to pay service tax on the grossed up charges in terms of Rule 7 of Point of Taxation Rules, 2011 read with Section 67 of the Finance Act. He submits that Shri Sunil Mittel in his statements dated 12.10.2017 and 13.10.2017 accepted that the WHT paid by them on behalf of VISA are reimbursed and they paid service tax on net basis and that they are not discharging service tax on the WHT paid on behalf of MasterCard. Revenue relies on Sheladia Rites – 2019 (27) GSTL 707 (Tri. Hyd.) and Commr. of Service Tax Vs Bhayana Builders (P) Ltd. – 2018 (10) GSTL 118 (SC).
7. Learned Authorized Representative rebuts the contention of the learned Counsel for the appellants and submits that the reliance placed by the learned Counsel on the case of Magarpatta Township Development and Construction Co. Ltd. (supra) is incorrect as the adjudicating authority has distinguished the case. He submits that the appellant had deposited the amount of service tax before issuance of the impugned order; however, the appellant did not bring the fact of payment to the knowledge of the adjudicating authority; service tax of Rs.5,30,197/-was deposited on 22.06.2018 whereas the Show Cause Notice was issued on 25.04.2018; the payment of tax being after the issuance of Show Cause Notice and they did not deposit penalty in terms of Section 78, benefit under Section 80 cannot be given.
8. Vide Additional Written Submissions, learned Authorized Representative submitted the Para-wise comments given by the Investigation Agency, who issued the Show Cause Notice; the same are as follows:
- It is incorrect to say that WHT does not form part of the Consideration; the appellants have not provided any documentary proof of reimbursement by VISA; in terms of Point of Taxation Rules, service tax is liable to be paid immediately after the payment of WHT.
- The appellants are not only paying for the services of the overseas VISA/ MasterCard, they are also paying the WHT which is nothing but an indirection Consideration over and above the value of the services build; the case law of M/s Degremont Ltd. and International Consultancy Services Ltd. is not applicable as the service tax is demanded only on gross amount charged by the service provider; WHT charges are not reimbursable expenses.
- The arguments of the appellants are self-contradictory as for some period, they have paid service tax on the grossed-up value and for some period on the invoice value.
- In respect of MasterCard, the appellants claim that the amounts are reimbursed and hence paid service tax on grossed up value from April 2013 and only during July 2012 to March 2013, they have not discharged the liability; as there is no clarity on the exigibility of WHT to service tax, extended period cannot be invoked. The arguments are incorrect; any payment made after investigation initiated could be treated as payment on account of suppression only.
- Rule 6(3) is not applicable as it pertains to non-provision of service or deficiency of service; the argument on revenue neutrality negates the very scheme of service tax which requires to be paid at every stage as applicable.
- The appellants have paid service tax for some period and have not paid for some periods and therefore, no issue of interpretation is involved; hence, extended period is correctly invoked; interest under Section 75 is justified as there is violation of Section 70 inasmuch as the appellants did not file ST-3 Returns properly; in view of the suppression of fact, penalty under Section 78 is also imposable.
9. Heard both sides and perused the records of the case. Brief issue involved in the case is as to whether the Withholding Tax paid by the appellants in respect of the consideration received from their overseas partners i.e VISA and MasterCard, in the assessable value of the service tax payable by the appellant under Reverse Charge Mechanism. It is the argument of the appellant that in terms of the Agreement with Master Card, the appellants were not being reimbursed the WHT paid by them; they have been paying service tax on the grossed-up value in terms of Section 195A of the Income Tax Act, 1961; however, the appellants have not discharged service tax of Rs.5,30,197/- for the period July2012 to March 2013; they have paid the same before the issuance of Show Cause Notice. The appellants also contend that in terms of the Agreement with VISA, the appellant was required to furnish the proof of payment of WHT to VISA who used to issue periodical letters to the appellant to reimburse the said amount on a quarterly basis on submission of proof of deposit of WHT; the appellants have shown the amount as recoverable in their books of accounts and the appellant used to adjust the recoverable amount by such reimbursement; it was the contention of the appellants that the burden of the WHT paid on behalf of VISA was reimbursed to them and therefore, they are not required to pay the service tax on grossing-up the WHT.
10. It is the contention of the Revenue that the expenses incurred by the appellant on account of WHT on behalf of VISA or MasterCard are consideration for the services they received in terms of Rule 7 of the Point of Taxation Rules, 2011; the Point of Taxation shall be the date on which payment is made by the service recipient. Revenue argues that in terms of Section 67 of the Finance Act, 1994, gross consideration received by the appellants forms the assessable value for the purpose of payment of service tax.
11. We find that Section 67 of the Finance Act, 1994 provides as follows:
(1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,-
i. in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
ii. in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration;
iii. in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed
Explanation.-For the purposes of this section,-
4[(a) “consideration” includes-
i) any amount that is payable for the taxable services provided or to be provided;
(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;
(iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.]
(c) “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and 2[book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.]
12. We find that in the facts and circumstances of the case, the contracts entered into by the appellants are distinct in relation to the reimbursement of WHT; while the Agreement with MasterCard indicated that such WHT is not reimbursable, the Agreement with VISA indicated that VISA would reimburse the WHT periodically on providing the necessary proof of payment of WHT by the appellants. In this background, it is seen that the appellants have been paying service tax on the grossed-up value in respect of the consideration received from the MasterCard and have not been paying service tax in respect of VISA. We find that Hon’ble Supreme Court in the case of Bhayana Builders — 2018 (10) GSTL 118 (SC) held that:
12. On a reading of the above definition, it is clear that both prior and after amendment, the value on which service tax is payable has to satisfy the following ingredients:
a. Service tax is payable on the gross amount charged the words “gross amount only refers to the entire contract value between the service provider and the service recipient. The word “gross” is only meant to indicate that it is the total amount charged without deduction of any expenses Merely by use of the word “gross the Department does not get any jurisdiction to go beyond the contract value to arrive at the value of taxable services. Further, by the use of the word “charged”, it is clear that the same refers to the amount billed by the service provider to the service receiver. Therefore, in terms of Section 67, unless an amount is charged by the service provider to the service recipient, it does not enter into the equation for determining the value on which service tax is payable.
b. The amount charged should be for “for such service provided”: Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words “for such service provided the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the service provider is neither an amount “charged” by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined
13. A plain meaning of the expression the gross amount charged by the service provider for such service provided or to be provided by him’ would lead to the obvious conclusion that the value of goods/material that is provided by the service recipient free of charge is not to be included while arriving at the ‘gross amount simply, because of the reason that no price is charged by the assessee/service provider from the service recipient in respect of such goods/materials. This further gets strengthened from the words ‘for such service provided or to be provided by the service provider/assessee. Again, obviously, in respect of the goods/materials supplied by the service recipient, no service is provided by the assessee/service provider. Explanation 3 to sub-section (1) of Section 67 removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service before, during or after provision of such service, implying thereby that where no amount is charged that has not to be included in respect of such materials/goods which are supplied by the service recipient, naturally, no amount is received by the service provider/assessee. Though, sub-section (4) of Section 67 states that the value shall be determined in such manner as may be prescribed, however, it is subject to the provisions of sub-sections (1), (2) and (3). Moreover, no such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value.
13. We further find that in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. — 2018 (10) GSTL 401 held as follows:
In this hue, the expression ‘such’ occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing ‘such’ taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such ‘taxable service’. That according to us is the plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 1, 2006) or after its amendment, with effect from, May 1, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasized that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider for such service’ and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.
14. We find that in terms of the exposition, as above, of the provisions of Section 67A of the Finance Act, 1994, gives an understanding that the consideration received must be for the service provided. In case, a part of the consideration is identifiable not to be for provision of such service, the same cannot be considered as consideration for the purposes of payment of service tax. In the impugned case, we find that there is a clear-cut demarcation between the two Agreements. While the Agreement with MasterCard does not recognize the payment of WHT by the appellants as reimbursable expenses, the Agreement with VISA considers it to be reimbursable subject to provision of proof. In case of the MasterCard Agreement, the entire consideration received by the appellants is to be treated as gross consideration as that is the amount paid by the appellant to the overseas MasterCard for the services received. Therefore, rightly the appellant treated the grossed-up value as the consideration and discharged the due service tax.
15. We find that Mumbai Bench of the Tribunal in the case of Magarpatta Township Developers and Construction Co. Ltd.- 2016 (43) STR 132 (Tri. Mumbai) held that:
8. Service Tax Valuation Rules, 2006 before amendment by Notification No. 24/2012-S.T., specifically Rule 7 needs to be read to arrive at the correct value of taxable service provided from outside India relevant Rule is reproduced: –
“7. Actual consideration to be the value of taxable service provided from outside India
1. The value of taxable service received under the provisions of Section 66A, shall be such amount as is equal to the actual consideration charged for the services provided or to be provided.
2. Notwithstanding anything contained in sub-rule (1), the value of taxable services specified in clause (ii) of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, as are partly performed in India, shall be the total consideration paid by the recipient for such services including the value of service partly performed outside India.”
It can be seen from the above reproduced Rule that for the purpose of discharge of Service Tax for the service provided from outside India, the value is equal to the actual consideration charged for the services provided or to be provided. In the case in hand, we specifically asked for the invoice/bill raised by the service provider and on perusal of the same, we find that appellant had discharged the consideration as raised in the said invoice/bill. There is nothing on record that indicates that the appellant had recovered that amount of Income Tax paid by them on such amount paid to the service provider from the outside India and any other material to hold that this amount is paid as consideration for services received from service provider.
9. In our considered view, the plain reading of Section 67 with Rule 7 of Service Tax Valuation Rules, in this case in hand, Service Tax liability needs to be discharged on amounts which have been billed by the service provider.
16. We also find that Chennai Bench of the Tribunal in the case of TVS Motor Co. Ltd. – 2021 (55) GSTL 459 held that the situation would be different if the TDS is deducted from the actual consideration and is not borne by the Indian counterpart. This judgement was followed this decision in the case of ITD ITD Cem Joint Venture vide Final Order No.60027/2024 dated 30.01.2024. Chennai Bench observed in the case of TVS Motor Co. (supra) that:
14.1.1 Section 67 of the Finance Act, as reproduced above, would show that Service tax is payable on the gross amount charged by the service provider. The Department does not dispute that the TDS amount is borne by the appellant. The case of the Department is that when the TDS amount is grossed up with the actual consideration agreed between the parties, the TDS portion would become part of the consideration and has to be included in the taxable value.
14.1.2 Section 195 of the Income-tax Act, 1961, is basically concerned with the Tax Deducted at Source (TDS) for the non-residents. The Act lays out a provision to avoid revenue loss as a result of tax liability in the hands of a foreign resident, by deducting such tax at source from the payments made to them. This is to ensure that the tax due from non-residents is secured at the earliest point of time so that there is no difficulty in its collection for the reason that the nonresident may sometimes have no assets in India. Failure to do so will render the person liable to penalty.
14.1.3 On perusal of Section 195, it uses the word “any sum chargeable under the provisions of the Act”. Unlike other provisions in Chapter XVII (TDS) provisions), Section 195 uses “any sum” instead of “any income by way of”. This would mean any sum that is paid to the non-resident which bears the character of income and gross amount, the whole of which may or may not represent income or profits. It is also a requirement that the document should mention that the Indian Counterpart of the transaction would bear the tax for deducting TDS by grossing up the value. To comply with this provision, as per the accounting practice, the appellant has grossed up the TDS amount with the actual consideration. Section 195A of the Income-tax Act reads as under:
“where under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.”
14.1.4 The TDS is paid/deposited to Government by the appellant out of a statutory liability. Such activity of deducting the tax at source is a legal obligation and the amount so deducted cannot be taken as consideration for services rendered. The amount on which the parties have reached a consensus ad idem can only be the consideration for the services. Further, the amount of tax deducted varies and depends upon the rate in force. There is no agreement by the parties with regard to the amount of TDS that has to be deducted. It wholly depends upon the law prevailing in the direct tax regime.
14.2.1 Section 2(d) of the Indian Contract Act, 1872, defines “consideration”. Compliance with statutory provisions cannot be considered as rendering of service. Again, “consideration” is not doing something which a person is bound by law to do. When the amount is paid at the will of a person not party to the agreement, such amount does not bear the character of consideration. It has to be noted that in the present case, there is no consent from the foreign counterpart to reduce his consideration by deducting the income tax liability from the agreed consideration. While doing business with the foreign counterpart and making payment, they are bound to deduct the tax and deposit with the Government. The appellants have thus grossed up the TDS and complied with the statutory obligation. The situation would be different if the TDS is deducted from the actual consideration and is not borne by the Indian counterpart. When the foreign counterpart does not agree to forego the TDS portion from the consideration agreed, then it becomes legally incumbent upon the appellant to gross up the value as under Section 195A.
17. From the above decisions of the Tribunal, it is clear that the consideration as received for the service, that is to say the consideration mentioned in invoice to be to such service, is the assessable value for the purposes of levy of service tax, provided no other amounts have been paid over and above the value shown in the invoice. As far as the amounts that flow to the service provider (to the service receiver in case of reverse charge), the same constitutes gross consideration in terms of Section 67D. We find that Revenue relies on the decision in the case of Sheladia Rites (supra). We find that every case needs to be understood in the facts and circumstances of the particular case. In the impugned case herein, there are two Agreements which are distinct and which are treated differently by the appellants themselves. Therefore, the ratio of Sheladia Rites (supra) cannot be applied. In the instant case, the amounts paid by the appellant to the MasterCard, including the WHT, are accruing to MasterCard themselves. Therefore, the grossed-up value is correctly considered by the appellants as consideration and applicable service tax was discharged on the same. In case of amounts paid to VISA card, the amount of WHT is agreed to be reimbursed to the appellant and therefore, that amount does not form part of consideration as it flows back to the appellant, the service recipient. Therefore, we find that the appellants were right in not discharging the service tax on the same.
18. In respect of service tax of Rs.5,30,197/-, for the period July 2012 to March 2013, paid by the appellants before the issuance of Show Cause Notice. We find that Revenue argues that in spite of the fact that the amount was deposited before the issuance of impugned order, the appellant did not bring the fact of payment to the knowledge of the adjudicating authority and that as the duty stands paid on 22.06.2018 and the show cause was issued on 25.04.2018, the appellants are liable to pay penalty under Section 78 of the Finance Act, 1994. We find that the appellant submits that the Show Cause Notice dated 25.04.2018 covering the period July 2012 to June 2017 has invoked extended period of limitation without substantiating with any evidence. We find that as the issue came to be settled by a series of judgements by the Tribunal at a later date, there are reasons to believe that the appellants could have entertained a bona fide belief. Moreover, Revenue does not highlight with evidence any act of suppression etc. on the part of the appellants with an intent to evade payment of duty. Moreover, the appellants have been filing ST-3 Returns regularly. We find, for these reasons, that Revenue has not made out any case for invocation of extended period. Therefore, no case has been made out for levy of penalties on any count. In view of the decision of the Principal Bench in the case of Shyam Spectra vide Final Order No. 56196/2024 dated 31.07.2024 held, following Hon’ble Kolkata High Court judgment, in the case of Infinity Infotech Parks -2014 (36) S.T.R. 37 (Cal.) decided on 30.04.2014, that if the demand for extended period is set aside, demand for normal period can also not be sustained.
19. In view of the above, the appeal is allowed.
(Order pronounced in the open court on 06/02/2025)
