‘Consideration’ has not been defined in the Act. The definition of ‘consideration’ as given in the Indian Contract Act, 1872 can safely be adopted to understand the concept of consideration. When so applied to the Act, ‘consideration’ for a service provided or agreed to be provided by service provider would mean anything which the service receiver or any other person has done or abstained from doing, or does or abstain from doing, or promises to do or to abstain from doing for receiving the service.
In simple term, ‘consideration’ means everything received in return for a provision of service which includes monetary payment and any consideration of non-monetary nature as well as deferred consideration.
Implications of the condition that activity should be carried out for a ‘consideration
♦ To be taxable an activity should be carried out by a person for another for a ‘consideration’
♦ Activity carried out without any consideration like donations, gifts or free charities are therefore outside the ambit of service. For example grants given for a research where the researcher is under no obligation to carry out a particular research would not be a consideration for such research.
♦ An act by a charity for consideration would be a service and taxable unless otherwise exempted
♦ Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service.
♦ Donations to a charitable organization are not consideration unless charity is obligated to provide something in return e.g. display or advertise the name of the donor in a specified manner or such that it gives a business advantage to the donor.
Meaning of monetary consideration
Monetary consideration means any consideration received in the form of money. ‘Money’ includes not only cash but also cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller’s cheque, money order, postal or electronic remittance or any such similar instrument when used as consideration to settle an obligation.
Non-monetary consideration?
Non-monetary consideration could be in the form of following:
♦ Supply of goods and services in return for provision of service
♦ Refraining or forbearing to do an act in return for provision of service
♦ Tolerating an act or a situation in return for provision of a service
♦ Doing or agreeing to do an act in return for provision of service
Illustrations
| If…… | And in return… |
| A agrees to dry clean B’s clothes | B agrees to click A’s photograph |
| A agrees not to open dry clean shop in B’s neighbourhood | B agrees not to open photography shop in A’s neighbourhood |
| A agrees to design B’s house | B agrees not to object to construction of A’s house in his neighbourhood |
| A agrees to construct 3 flats for B on land owned by B | B agrees to provide one flat to A without any monetary consideration |
Then
For the services provided by A to B, the acts of B specified in 2nd column are non-monetary consideration provided by B to A. Conversely, for services provided by B to A, similar reasoning will be adopted.
Importance of value of non-monetary consideration
Yes. The non-monetary consideration also needs to be valued for determining the tax payable on the taxable service since service tax is levied on the value of consideration received which includes both monetary consideration and money value of non-monetary consideration.
How is the money value on non-monetary consideration determined?
The value of non-monetary consideration is determined as per section 67 of the Act and the Service Tax (Determination of Value) Rules, 2006, which is equivalent money value of such consideration and if not ascertainable, then as follows:-
♦ On the basis of gross amount charged for similar service provided to other person in the ordinary course of trade;
♦ Where value cannot be so determined, the equivalent money value of such consi-deration, not less than the cost of provision of service.
Are research grant with counter obligation on researcher to provide IPR rights on outcome of a research a consideration?
In case research grant is given with counter obligation on the researcher to provide IPR rights on the outcome of research or activity undertaken with the help of such grants then the grant is a consideration for the provision of service of research. General grants for researches will not amount to a consideration.
Would the payments in the nature as explained in column A of the table below constitute a consideration for provision of service?
| S. No. | A | B |
| Nature of payment | Whether consideration for service? | |
| 1. | Amount received in settlement of dispute. | Would depend on the nature of dispute. Per se such amounts are not consideration unless it represents a consideration. If the dispute itself pertains to consideration relating to service then it would be a part of consideration.For example the amount may represent payments for an executed works contract in dispute. |
| 2. | Amount received as advances for performance of service. | Such advances are consideration for the agreement to perform a service. |
| 3. | Deposits returned on cancellation of an agreement to provide a service. | Returned deposits are in the nature of a returned consideration. If tax has already been paid the taxpayer would be entitled to refund subject to provisions in this regard. |
| 4. | Advances forfeited for cancellation of an agreement to provide a service. | Since service becomes taxable on an agreement to provide a service such forfeited deposits would represent consideration for the agreement that was entered into for provision of service. |
| 5. | Security deposit that is returnable on completion of provision of service. | Returnable deposit is in the nature of security and hence do not represent consideration for service. |
| 6. | Security deposits forfeited for damages done by service receiver in the course of receiving a service | If the forfeited deposits relate to accidental damages due to unforeseen actions not relatable to provision of service then such forfeited deposits would not be a consideration in terms a clause proposed to be inserted in rule 6 of the Valuation Rules. |
| 7. | Fines and penalties paid for violation of provisions of law. | These are not considerations as no service is received in lieu of payment of such fines and penalties. |
| 8. | Excess payment made as a result of a mistake | If returned it is not consideration. If not returned and retained by the service provider it becomes a part of the taxable value. |
| 9. | Demurrages payable for use of services beyond the period initially agreed upon e.g. use of containers beyond the normal period. | This will be consideration and is being so provided in the amendments made to Rule 6 of the Valuation Rules. |
Can a consideration for service be paid by person other than the person receiving the benefit of the service?
Yes. The consideration for a service may be provided by a person other than the person receiving the benefit of service as long as there is a link between the provision of service and the consideration. For example, holding company may pay for works contract service or architect services that are provided to its associated companies.
What if value without GST is below Rs 50 Lacs and value including GST is above Rs 50 Lacs.
In such case, whether purchaser is required to deduct TDS ?
Could you please share any caselaw or circular to support your answer