2016 (3) TMI 811 - AT - Service Tax

Liability of Service tax on TDS amount absorbed by the assessee on foreign remittance - Reverse charge as per provision of Section 66(A) of the Finance Act 1994 - Reverse Charge Mechanism - Amount paid to foreign architect as consultancy charges under Technical Consultancy Services - Department contended that appellant having discharged the Income Tax liability on the amount so paid Service Tax liability arises on the Income Tax amount deducted as TDS and paid to Government of India - Held that - appellant had discharged the consideration as raised in the invoice/bill but 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 is consideration for services received from service provider. As per Section 67 with Rule 7 of Service Tax Valuation Rules the Service Tax liability needs to be discharged on amounts which have been billed by the service provider. Therefore appellant is not liable to pay service tax. - Decided in favour of appellant with consequential relief

Summary

The core legal question considered by the Tribunal is whether the appellant, who engaged a foreign architect for technical consultancy services, is liable to pay Service Tax under the Reverse Charge Mechanism (RCM) on the amount of Income Tax (TDS) deducted and paid to the Government, in addition to the consultancy fees paid to the foreign service provider.

Another issue implicit in the case is the correct valuation of taxable services under Section 67 of the Finance Act, 1994, and the applicability of Rule 7 of the Service Tax (Determination of Value) Rules, 2006, specifically in the context of services received from outside India.

Regarding the first issue, the Tribunal examined whether the Income Tax amount paid by the appellant on behalf of the foreign architect forms part of the taxable value for Service Tax under RCM. The appellant contended that the agreement with the foreign architect stipulated payment of a net amount (net of taxes), and that Service Tax liability had already been discharged on the actual consultancy fees paid. The Revenue argued that since the appellant paid Income Tax on behalf of the foreign architect, this amount should also attract Service Tax under RCM.

The Tribunal analyzed Section 67 of the Finance Act, 1994, which governs the valuation of taxable services for charging Service Tax. Section 67(1)(i) provides that when consideration for service is in money, the value shall be the gross amount charged by the service provider. The term "gross amount charged" is further explained to include all forms of payment but does not extend to amounts paid as taxes on behalf of the service provider. The Tribunal emphasized that the value for Service Tax purposes must be the gross amount charged by the service provider and not any additional taxes paid by the recipient.

Further, Rule 7 of the Service Tax Valuation Rules, 2006, was considered. This rule states that for taxable services received from outside India under Section 66A, the value shall be the actual consideration charged for the services provided or to be provided. The Tribunal noted that the appellant had discharged Service Tax on the actual invoice amount billed by the foreign architect and there was no evidence that the Income Tax paid by the appellant was recovered from the foreign architect or formed part of the consideration for services.

The Tribunal rejected the Revenue's contention that the Income Tax amount paid by the appellant should be included in the taxable value for Service Tax. It was held that the Income Tax paid is a statutory obligation of the appellant under the Income Tax Act and does not constitute consideration for the technical consultancy services. Therefore, it cannot be subjected to Service Tax under RCM.

The Tribunal also relied on precedent from a previous Tribunal decision which supported the principle that Service Tax valuation must be based on the actual consideration charged by the service provider, excluding taxes paid by the recipient on behalf of the provider.

In conclusion, the Tribunal held that the Service Tax liability under the Reverse Charge Mechanism arises only on the gross amount charged by the foreign architect as per the invoice, and not on the Income Tax deducted and paid by the appellant. The impugned order which held otherwise was set aside and the appeal was allowed.

Significant holdings include the Tribunal's clear interpretation of Section 67(1)(i) of the Finance Act, 1994, emphasizing that "the value shall be the gross amount charged by the service provider for such service provided or to be provided by him," excluding any taxes paid by the recipient on behalf of the provider. The Tribunal stated:

"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."

This principle establishes that for services received from outside India, the taxable value under RCM is the actual consideration charged by the foreign service provider, and statutory taxes borne by the recipient do not form part of the taxable value.

The final determination was that the appellant is not liable to pay Service Tax on the Income Tax amount deducted and paid to the Government, but only on the consultancy fees invoiced by the foreign architect. The impugned order was set aside accordingly.