Manas Joshi
As you all are aware that as per the general principle of service tax law, the liability to pay service tax lies on the service provider but as per Section 68(2) of Finance Act, 1994 read with Rule 2(1)(d)(G) 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. Thus, in case of import of service, service tax needs to be paid by the receiver of service under the provisions of reverse charge mechanism. The concept of reverse charge mechanism on import of service was introduced in April 2006 however, even now, many times question is raised as to whether service tax under reverse charge mechanism is required to be paid on value including TDS or excluding TDS. These two situations are explained below for better understanding:
| Particulars | Situation 1 (inclusive of TDS) | Situation 2 (exclusive of TDS) |
| Basic Value of imported service (invoice value) | Rs. 100 | Rs. 100 |
| TDS amount Rs. 10 | ||
| Amount payable to service provider | Rs. 90 | Rs. 100 |
| TDS payable | Rs. 10 | Rs. 10 |
| Total Payment | Rs. 100 | Rs. 110 |
Situation One (including TDS) – in this case, law is pretty clear and I am sure there won’t be any confusion to answer this question. Since invoice is raised for Rs. 100/-, service tax needs to be paid on Rs. 100/- irrespective of the fact that only Rs. 90/- has been paid and remaining amount of TDS has been deposited to the Government of India.
Situation Two (excluding TDS) – I continue with the above example with just one change. I just include one clause in the agreement saying that all the taxes (Indian Taxes) are to be borne by the receiver of service. By adding this one sentence, let’s see what would be the scenario. As agreed, holding company will raise an invoice of Rs. 100/- (for royalty / technical know-how) on Indian company and Indian company will pay Rs. 100/- to its holding company without deducting any amount as TDS. Because of mention of this clause, an Indian company is responsible to pay TDS amount of Rs. 10/- to the Government of India from its own pocket which would be over and above royalty / technical know-how payment of Rs. 100/-. Now the question is to whether service tax is required to be calculated on Rs. 100/- or Rs. 110/-. In the below discussion, I have tried to give some focus on this question.
Value to be considered for the purpose of calculating service tax related to import of service
At the outset, I wish to state that upto 30th June 2012, Rule 7(1) of Service Tax (Determination of Value) Rules, 2006 was dealing with the valuation for the purpose of taxable service provided from outside India. As per this Rule, service tax was required to be charged on the actual consideration charged for the services provided or to be provided. However, w.e.f. 1st July 2012 onwards, this Rule 7 has been omitted and therefore, we need to refer Section 67 of the Finance Act. The relevant text of Section 67 is reproduced below for your ready reference:
SECTION 67. Valuation of taxable services for charging service tax. — (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such 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;
The relevant text of the Section 67 is underlined for your ready reference. As per this provision, the following aspects needs to be considered:
a) The amount should be charged by the service provider himself; and
b) The amount shall be charged for the service provided or to be provided.
Considering the above aspects, one can say that any tax amount 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 stand can also be supported by the following references:
a) Notification No. 29/2012-ST dated 20th June 2012 which provides that in case of renting of immovable property, exemption equal to the amount of property tax paid can be claimed while charging service tax;
b) Rule 2A of Valuation Rules, 2006 which provides that for the purpose of charging service tax, Value Added Tax to be excluded from the value of taxable service.
In support to the above stand, I reply on the following case:
IN RE: Sundaram Auto Components Ltd. reported in 2012 (28) STR 545 (Commr. Appl.) wherein it was held that – foreign company to receive fixed net amount payable in four instalments and any tax liability to be borne by assessee – Consideration received by service provider independent of TDS amount – Also, not a case where TDS deducted from gross amount charged and tax paid on net amount – Therefore, TDS value not to be included in taxable value – Sections 67 and 66A of Finance Act, 1994.
Though the above decision is in favour, we cannot overlook adverse decision of the Hon’ble Tribunal, which is the higher authority, in the case of TVS Motors Co. Ltd. v/s CCE, Chennai-II which is reported in 2012 (28) STR 150 (Tri. Chennai) wherein it was held that – Rule 7(1) of Service Tax (Determination of Value) Rules, 2006, measure of value for taxation of services under said Section 66A ibid shall be amount equal to actual consideration charges for services provided or to be provided – Absence of pleadings supporting defence of impugned amount deducted at source not to form part of gross amount of taxable services received – Also, in terms of said Section 66A ibid services covered to be treated as if recipient himself provided services in India – Thus, by legal fiction consideration inclusive of Income tax deducted at source to be assessable value of service recipient – Terms of agreement establishing tax payable in India to form part of contract price – Therefore, assessable value comprising consideration inclusive of tax deducted at source – Sections 66A and 67 ibid.
Though Rule 7 of Valuation Rule, 2006 has been deleted w.e.f. 1st July 2012, the above decisions and Notifications are still important to understand the provisions of Section 67 of the Finance Act with regard to valuation. Thus, keeping in mind that Rule 7 has been deleted and above decisions might be ineffective w.e.f. 1st July 2012, we now need to refer Section 67 of the Finance Act, 1994. As discussed above, service tax is now required to be charged on the “gross amount charged”. I once again reproduce below the text of the relevant clause of Section 67:
(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
The terms “consideration” and “gross amount charged” are defined in the Section 67 however, it does not clarify about inclusion or exclusion of TDS amount. Further as discussed above, any tax shall not form part of value of taxable service and the example we discussed were property tax and VAT. However, recovery of these taxes from the service receiver is at the option of the service provider. However, in case of TDS, being direct tax incidence, cannot be passed on. Therefore, it can be said that TDS amounts to “additional consideration” paid to the service provider and accordingly, TDS amount needs to be included in the gross amount charged for the purpose of calculating service.
Moreover, the sentence “gross amount charged” should not be strictly interpreted to mean that such TDS amount has to be actually charged by the service provider in his invoice / agreement. In the first example, as discussed in the table, indeed Rs. 100/- was charged which is cum TDS and therefore, there is no doubt that service tax is payable on Rs. 100/- which includes TDS. Now, in the second example, the amount of TDS is not included in the royalty amount however, TDS is paid over and above of royalty amount. Considering the first example, same analogy needs to be applied to the second example as well by applying a legal fiction and therefore, in the second example, TDS of Rs. 10/- needs to be included in the value of taxable service. This interpretation regarding applying of a legal fiction is also supported by the decision of the Hon’ble Tribunal as discussed above.
Considering the above discussion, one can very well say that service tax on import of service needs to be paid on TDS amount irrespective of the fact that TDS amount is included in the invoice raised by the foreign company or not. I must say here that this is not a conclusion of my discussion and I invite valuable inputs from readers just to be prepared for GST.
(Author Details -Mr. Manas Joshi, B.Com., DTL, LLB, CLM – Director at Proficient Partners Consultancy Pvt. Ltd.)
CAN WE FILE THE TDS RETURN ON SALARY(QTR-4 OF 2022) IF ONE EMPLOYEE JOIN OUR COMPANY IN JAN 2022 AND WE DEPOSITED EPF AND TDS ON TIME OR BEFORE FILLING THE TDS RETRUN AS OUR COMPANY NOT PAID ANY AMOUNT AMOUNT TO HIM AGAINST SALARY PAYABLE.
I am also of the view that Service tax should be levied on TDS amount because if it isnt, this could be a scheme to avoid Service tax on additional consideration. Moreover TDS is a direct tax (more precisely a refundable tax), therefore this has to be seen as an “passed on expense” for valuation purpose.
TDS on second situation would be Rs.11/-
i think tds calculation in the second example is incorrect. tds should be calculated in gross up basis.
Definition of consideration changed in this budget.
“consideration” includes–
1.any amount that is payable for the taxable services provided or to be provided;
2. 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;
after reading definition we can consider the service tax should not be paid on TDS amount in second condition.
The intention of the Legislature for including TDS with the Net Amt paid to Service Provider was to ensure that service tax is paid on Gross Service Charge and not on the net amt paid to service provider. If the TDS is borne by the service receiver due to grossing up provision then it should be excluded for calculation of service tax. In this case, there is an additional tax expense ( TDS ) which is to be borne by the service receiver due to statutory obligation casted upon by Income Tax. There cannot be any tax on tax. The Revenue cannot go beyond the Invoice Value and charge service tax on such TDS.
TDS in second exaample i think not correct, It should be Rs. 11.11.