BASICS IN VALUATION OF TAXABLE SERVICES

[Dr. Sanjiv Agarwal]

Valuation of taxable services for charging service tax is governed by section 67 of Finance Act 1994 and Service Tax (Determination of Value) Rules, 2006 notified vide Notification No 12/2006-ST dated 19.4.2006 and subsequent amendments. The new valuation provisions are effective from 18^th April, 2006.

             Changes   made by the Finance Act, 2006

            W.e.f. 18.4.2006, by Finance Act, 2006, section 67 of the Finance Act, 1994 has been substituted by a new section. Unlike the earlier system of valuation of taxable services based on gross amount charged subject to some exclusions and inclusions, the new valuation norms provide for a three tier valuation mechanism and for the first time in service tax legislation, provisions for valuation of non-monetary consideration had been provided for. The valuation of services is now done on three fold as basis under -

i)	Where the provision of service is for consideration in money	Gross amount charged by the service provider for such services provided or to be provided
ii)	Where the provision of service is for a consideration not wholly or partly consisting of money (i.e., partly in cash, partly in kind)	Amount of money with addition of service tax, equivalent to the consideration
iii)	Where the provision of service is for a consideration which is not ascertainable	Amount as may be determined in prescribed manner

            Meaning of  Value

Rule 2 of Service Tax (Determination of Value) Rules, 2006 defines value as referred to in Section 67 of the Finance Act, 2006 i.e., gross amount charged by the service provider for taxable services provided or to be provided. When it is in money terms the consideration in money would include any amount that is payable for the taxable services provided or to be provided. The terms- consideration, money and gross amount charged have been defined by way of explanation to Section 67.

Meaning of consideration, money and gross amount for the purpose of valuation of taxable services

            Under service tax provisions, 'Consideration' has been explained to include any amount that is payable for the taxable services provided or to be provided. It means any amount that is payable i.e., past present and future liability, all are included. Also services may have already been rendered, being rendered or to be rendered in future. Amount payable, whether paid or not or whether recovered or not shall be included in 'consideration'.

Money has bee defined to include all forms of money except the currency that is held for its numismatic value. It will include any -

-                      currency

-                      cheques

-                      promissory notes

-                      letter of credit

-                      draft

-                      pay orders

-                      traveller's cheque

-                      money order

-                      postal remittance (order)

-                      any other similar instrument.

Any other similar instrument is a residual entry which will cover all types of bills of exchange, hundi, cash in transit etc., but not goods for value of money.

Gross amount charged has been defined to include payments by way of -

-                      cheque

-                      credit card

-                      deduction from account

-                      any form of payment by issue of credit notes or debit notes and book adjustments

            Gross amount  inclusive of service tax

            Section 67(2) provides that where the gross amount charged by the service provider for the taxable services provided or to be provided is inclusive of service tax payable, the value of taxable service in such case shall be the amount as with the addition of service tax payable, is equal to the gross amount charged.      

            Value of taxable service where the consideration is not wholly or partly in money

            Under Rule 3, value of taxable service is determined in cases where consideration is not wholly or partly in money terms, i.e., part of it is in cash and part of it is otherwise than for cash. In such cases, value of taxable service shall be equivalent to the gross amount charged by service provider in ordinary course of trade and gross amount charged will be the sole consideration.

Central Excise Officer shall have powers and right to satisfy himself about the accuracy of information or documents presented for this purpose to him (Rule 4).

            Taxable value where consideration is not ascertainable

.           Under Rule 3, it has been provided that where the taxable services provided are for a consideration in money term but such consideration or value is not ascertainable, the value of such services shall be determined by service provider as equivalent money value of such consideration which shall in no case be less than the cost of providing such taxable service. 

            Value of works contract

            Notification No. 29/2007-ST, dated 22-5-2007 has added  Rule 2A in Valuation Rules for determining the value of execution of works contracts w.e.f. 1-6-2007. The Works Contracts (Composition Scheme for Payment of Service Tax) Rules, 2007 has also been notified vide Notification No. 32/2007-ST, dated 22-5-2007 w.e.f. 1-6-2007 wherein service tax can be paid @ 2 per cent composite rate (@ 4 per cent w.e.f. 1-3-2008).

According to Rule 2 A of Service Tax (Determinations of Value) Rules, 2006, valuation of services involved in execution of works contracts shall be done as follows-

            (i)         Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.

(ii)                Where Value Added Tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service.

Exclusion and inclusion in gross value

The gross amount shall include and exclude as follows -

        (a)            gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract;

        (b)                        value of works contract service shall include,—

(i)    labour charges for execution of the works;

(ii)    amount paid to a sub-contractor for labour and services;

(iii)   charges for planning, designing and architect's fees;

(iv)   charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

(v)   cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

(vi)   cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and  services;

            Optional composition scheme for valuation of works contract

            The Work Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 has been notified vide Notification No. 32/2007-ST dated 22.5.2007 w.e.f. 1st June 2007. CBEC (TRU) has also clarified certain points vide letter dated 22.5.2007.

Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 contains rules for composition scheme which are effective from 1st June 2007 and are applicable only in relation to works contracts services as defined in section 65(105)(zzzza) of the Finance Act, 1994 (as amended by Finance Act, 2007). Accordingly, service provider or person liable to pay service tax has been given an option to discharge the service tax liability on the works contracts equivalent to two percent of the gross amount charged for the works contract, instead of paying at the normal rate of service tax on the gross value. In such scheme, the gross amount charged will not include the amount of sales tax or value added tax paid on the transfer of property in good involved in execution of works contracts. Once the option is exercised, it can not be withdrawn subsequently for such works contract and Cenvat credit will not be available for excise duty or cess paid on any inputs. However, Cenvat credit will be available in respect of capital goods and input services. It should be kept in mind that the option to opt for composition scheme should be given in writing to the Department prior to first payment of service tax in respect of such works contract and once the option is exercised it can not be withdrawn during the currency of the contract. Tax will have to be paid on the basis of composition scheme only. Though no form has been prescribed to exercise the option, assessee may communicate the same to the jurisdictional officers in writing by way of an application giving details of contract, service tax registration etc. The composition scheme comes as a trade facilitation measure and for administrative ease and convenience.               

Vide Notification No. 7/2008-ST dated 1.3.2008, Rule 3(1) of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 has been amended w.e.f. 1.3.2008 to enhance the rate prescribed for optional scheme for payment of service tax for works contracts service from 2 (two) percent to 4 (four) percent of the total value of contract excluding VAT amount.

The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and cannot be withdrawn until the completion of the said works contract.

Rejection of the value.          

Rule 5 provides powers to Central Excise Officer to reject the valuation done under Rule (3) above. Rule (3) shall and does not restrict the powers of Central Excise Officer to question about the accuracy of information furnished on documents presented for valuation. Central Excise Officer shall be empowered to issue a notice to service provider to show cause why the value of taxable service be notified, as specified in notice, where he is satisfied that value so determined by the service receiver under Rule 3 is not in accordance with provisions of Act. He cannot change the valuation unless notice is served on the service provider and show cause opportunity given. After the reasonable opportunity has been given, he can determine the value of taxable service under question for levy of service tax thereon.

Pure agent

            A pure agent or agent shall be a person who satisfies the following conditions -

(a)        enters into a contractual agreement with his client (recipient of service) to act as an agent of the client to incur expenditure or costs in the course of providing a taxable service;

(b)        neither intends not holds any title to the goods or services so provided as an agent of the client;

(c)        never uses such goods or services provided; and

(d)        receives the actual amount incurred to procure such goods or services.

            Circumstances for inclusion or exclusion of certain expenses or cost

            Rule 5 deals with circumstances where certain costs or expenses could be excluded from or added to value of taxable services. It has been provided that all expenses and costs incurred by the service provider for providing the taxable services during the course of such service shall be included as part of value of taxable services. In such cases, there will be no exemption or abatement from service tax in respect of such costs or expenses. For example, cost of consumables, office expenses, telephone expenses, rentals etc. However, where the service provider incurs expenses and cost as a agent of service receiver, i.e., for or on behalf of the service receiver (as a pure agent of the client), such costs or expenses shall be excluded from the value of taxable services. For claiming such costs or expenses to be out of scope of value of service, the service receiver should act as a pure agent or agent of the service receiver.

            Conditions to be satisfied for certain expenses / costs for exclusion from value of taxable service

            Following conditions must be satisfied in respect of certain expenses or costs for exclusion from the value of taxable service -

(i)         the service provider acts as an agent of the recipient of service when he makes payment to the third party for the goods or services procured;

(ii)        the recipient of service receives and uses the goods or services so procured by the service provider as an agent of the recipient of service;

(iii)       the recipient of service is liable for making payment to the third party;

(iv)       the recipient of service authorises the service provider to make the payment on his behalf;

(v)        the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by a third party;

(vi)       the service provider's payment on the service recipient's behalf is indicated separately when he invoices the recipient of service;

(vii)      the service provider recovers from recipient of service only the actual amount he has paid to the third party; and

(viii)      the goods or services procured by service provider from third party as a pure agent of recipient of service are in addition to the services he provides on his own account.

Inclusion in value of taxable service

Rule 6 deals with cases in which the commission, costs etc. shall be excluded from or included in the value of taxable services. The Rule 6 would operate subject to provisions of Section 67.

The value of taxable services shall include the following -

(i)         the aggregate of commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker;

(ii)        the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit;

(iii)       the amount of premium charged by the insurer from the policy holder,

(iv)       the commission received by the air travel agent from the airline;

(v)        the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;

(vi)       the reimbursement received by the authorised service station, from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer;

(vii)      the commission or any amount received by the rail travel agent from the Railways or the customer;

(viii)      the remuneration or commission, by whatever name called, paid to such agent by the client engaging such agent for the services provided by a clearing and forwarding agent to a client rendering services of clearing and forwarding operations in any manner; and

(ix)       the commission, fee or any other sum, by whatever name called, paid to such agent by the insurer appointing such agent in relation to insurance auxiliary services provided by an insurance agent.

            Exclusion from value of taxable service

            The value of taxable services shall exclude the following -

(i)         initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit;

(ii)        the airfare collected by air travel agent in respect of service provided by him;

(iii)       the rail fare collected by air travel agent in respect of service provided by him;

(iv)       interest on loans.

Actual consideration as value of taxable service

According to Rule 7, in cases where the taxable services are provided by person from outside India in India (Section 66A cases), the value of taxable services received shall be taken at such amount as is equal to the actual consideration charged for the services so provided or to be provided. This could, therefore, be taken as actual remittance made to service provider abroad.

 Value where taxable service is provided from outside India

            According to Rule 7 of Valuation Rules, in cases where the taxable services are provided by person from outside India in India (Section 66A cases), the value of taxable services received shall be taken at such amount as is equal to the actual consideration charged for the services so provided or to be provided. This could, therefore, be taken as actual remittance made to service provider

Applicability  on book adjustments  among associated enterprises

            Finance Act, 2008 has amended section 67 so as to include any amount debited or credited in the books of account within the scope of the term, 'gross amount charged' where transaction of taxable service is with associated enterprises including transactions in suspense account.

Transactions between associated enterprises would attract service tax even when there are only entries in the books of accounts and no money is actually exchanged. With the amendment made by Finance Act, 2008, associated enterprises will have to pay service tax on the basis of accruals instead of actual cash inflow/outflow, though there is no system of tax on accrual basis in service tax. For transactions between associated enterprises, any amounts debited or credited to books of accounts would be the basis for levy of service tax as such book entries will be included in the 'gross amount charged'. Thus, for such enterprises, book adjustments will also become basis for levy of service tax which was earlier based on actual receipts.

No service tax would be payable for such book adjustment where -

(a)   transactions are not between associated enterprises.

(b)   transactions does take place between associated enterprises but they do not relate to any taxable service.

(c)   associated enterprise does not render taxable services exceeding Rs. 10 lakh in aggregate, i.e., falling under small service provider exemption scheme.

(a)    Service is otherwise exempt under any rules, notifications etc.

 

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