Valuation of Services Service Tax (Determination of Value) Rules, 2006 July 2011

Contents Introduction Valuation Provisions  General Provisions  Associated Enterprise  Out of pocket expenses  Works Contract Service  Import of Services Rejection of Value Specific Cases 2

Introduction

Section 66 of the Finance Act, 1994 (‘the Finance Act’) provides that Service tax shall be levied on the value of taxable services Section 67 provides the mechanism for determination of value for the purpose of levy of Service tax Section 67(1)(iii) and 67(4) provides that, subject to the provisions of sub- sections (1), (2) and (3), the value shall be determined in the prescribed manner In terms of the above provisions, the Service Tax (Determination of Value) Rules, 2006 were notified vide Notification No. 12/2006, dated 19 th April 2006 (‘Valuation Rules’) 4

Valuation – General Provisions Section 67(1) – the value (i)in 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; In case of payment of consideration for provision of service is in money, the value shall be the gross amount charged by the service provider Gross amount charged would include the entire consideration, even for the goods supplied in the course of provision of services As the phrase ‘service provided or to be provided’ is covered, Service tax is payable even on the advance payments received for services to be provided Service tax on advance would continue to remain payable even after introduction of Point of Taxation Rules, 2011 Payment for the taxable service can be made by/to the third party. No restriction in this regard has been provided in the Act 5

Valuation – General Provisions Section 67(1) – the value (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. Valuation Rules – 3(a) & 3(b) – where the consideration received is not wholly or partly consisting of money, 3(a) the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide the similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration; 3(b) where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service 6

Valuation – General Provisions If the consideration is not wholly or partly consisting of money, the value shall be such amount which in addition to the Service tax charged, is equivalent to the consideration However, if the amount of consideration is not ascertainable, resort shall be made to Rules 3(a) & 3(b) In terms of Rule 3(a), if the amount of consideration is not ascertainable, value of taxable service shall be the gross amount charged by the service provider from other service recipients for providing similar service However, value of such similar service shall be in the ordinary course of business and be the sole consideration The terms ‘ordinary course of business’ and ‘similar service’ has been not defined Accordingly, determination of value of similar services in the ordinary course of business could result in litigation unless the assessee is ready to adopt the highest consideration received as comparable 7

Valuation – General Provisions Further, rule 3(b) provides that if the value is not ascertainable in aforesaid manner, value shall be determined by the service provider himself, which in no case shall be less than the cost of provision of such taxable service However, no method or formula has been prescribed for the above purpose The question regarding cost of provision of services also could result in litigation as the authorities may seek to include value of inputs supplied by the service receiver in all cases. 8

Section 67 (2),(3) &(4)– (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 If the amount of Service tax is not separately indicated on the invoice, than the gross amount charged shall be deemed to be inclusive of Service tax. In such case the value of service shall be calculated working backward The consideration may be received in advance, during the course of or after the provision of services. Therefore, the timing of receipt would have no bearing on the value of taxable service 9 Valuation – General Provisions

Explanation.—For the purposes of this section,— (a) “consideration” includes any amount that is payable for the taxable services provided or to be provided; (b) “money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value; (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 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. 10 Valuation – General Provisions

Valuation – Associated Enterprise Explanation to Section 67 – “……………..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.” In case of associate enterprises, generally transacts were used to be squared off and actual payments were not made Since liability to pay Service tax was on receipt basis, no Service tax was paid even on taxable services The valuation provisions provides that in case of associate enterprises, Service tax would be payable on the basis of entries in the books of accounts or on actual receipt basis, whichever is earlier The term ‘associated enterprise’ has the same meaning as assigned to it in section 92A of the Income Tax Act,

Valuation – Out of Pocket Expense Valuation Rules – 5(1) & 5(2) 5(1)Where any expenditure or cost are incurred by the service provider in the course of providing taxable service, all such expenditure or cost shall be treated as consideration for taxable service provided or to be provided and shall be included in the value for the purpose of charging Service tax on the said service. 5(2) Subject to the provisions of sub-rule(1), the expenditure or the cost incurred by the service provider as a pure agent of the recipient of service shall be excluded from the value of taxable service……. All the expenditure or costs, such as travelling expense, loading expense, etc incurred by the service provider, in the course of providing the taxable service, shall be included in the taxable value It is not relevant that the various cost or expenditure are separately indicated in the invoice issued by the service provider 12

Valuation – Out of Pocket Expense However, if the service provider act as a ‘pure agent’ of the client and procures goods or service on his behalf then the expenditure for such procurement can be claimed as reimbursement and will not be included in the value of taxable service ‘Pure agent’ means a person who –  Enters into a contractual agreement with recipient of service to act as a pure agent;  Neither intends to hold nor holds any title to the goods or services so procured;  Does not use such goods or services so procured; and  Receives only the actual amount The expenditure or cost incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service, if the following conditions as specified in rule 5(2), are fulfilled –  The service provider act as a pure agent of the recipient of service when he makes payment to the third party for the goods or service procured; 13

Valuation – Out of Pocket Expense  The service recipient receives and uses the goods or services so procured;  The service recipient is liable to make payment to the third party;  The service recipient authorises the service provider to make payment on his behalf;  The service recipient knows that the goods or service for which payment is made by the service provider shall provided by the third party;  The payment made by the service provider on behalf of the service recipient has been separately indicated in the invoice issued by the service provider to the recipient of service;  The service provider shall recover from the service recipient only the actual amount paid by him to the third party; and  The goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account Practically, only in rare cases, the above conditions would be fulfilled and accordingly, Service tax would be payable on the entire consideration in most of the cases 14

Valuation – Works Contract Service Rule 2A of the Valuation rules provides for the determination of the value of the Works contract service Value of a works contract service shall be the gross amount charged for the work contract as reduced by the value of transfer of property in goods involved in the execution of the works contract Gross amount charged shall have the same meaning as provided in section 67 of the Finance Act If any VAT/Sales Tax has been paid on the transfer of property involved in the execution of the works contract, it shall not be included in the value of gross amount charged Where any VAT/Sales Tax has been paid on the actual value of transfer of property in goods, then such value, adopted for the purpose of VAT or Sales Tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract 15

Valuation – Works Contract Service Where VAT/Sales Tax has been paid under the composition scheme or using the prescribed abatement, the determination of quantum of deduction would be a challenge These provisions would not be applicable when Service tax on Works Contract Service is paid under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 No credit of the excise duty paid on goods transferred in the said work contract shall be available Value of work contract service shall include:  Labour charges for execution of the works;  Amount paid to a sub-contractor for labour and services;  Charges for planning, designing and architect’s fees;  Charges for obtaining on hire or otherwise, machinery and tools used for the execution of works contract; 16

Valuation – Works Contract Service  Cost of consumables such as water, electricity, fuel, used in execution of works contract;  Cost of establishment of the contractor relatable to supply of labour and services;  Other similar expenses relatable to supply of labour and services; and  Profit earned by the service provider relatable to supply of labour and services. Essentially, the transactions which are purely in the nature of service are specifically listed. 17

Valuation – Import of Services The value in case of import of services shall be the actual consideration charged for services provided or to be provided In case of import of services partly performed in India, the value shall be the total consideration including the value of service partly performed outside India 18

Rejection of Value Rule 3 entrust the service provider with the responsibility to determine the value of the taxable service However, Rule 4 empowers the Central Excise Officer (‘CEO’) with the power to satisfy himself with the accuracy of the value determined If the CEO is satisfied that the value determined by the service provider is not in accordance with the provisions of the Act or the valuation rules, then he shall issue a show cause notice requiring to explain as to why the value of the taxable service shall not be fixed at the amount specified in the notice Thereafter, the CEO, after giving a reasonable opportunity of being heard, determine the value of the taxable service for the purpose of charging Service tax in accordance with the provisions of the Act and the rules 19

Subject to the provisions of section 67, the value of taxable service shall include;  The commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broke to any sub- broker.  The adjustment made by the telegraph authority from any deposit made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for the leased circuit;  The amount of premium charged by the insurer from the policy holder;  The commission received by the air travel agent from the airline;  The commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;  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; 20 Specific Cases – Inclusions

 The commission or any amount received by the rail travel agent from the railways or the customer;  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 operation in any manner  The commission fee or any other sum, by whatever name called, paid to an insurance agent by the insurer appointing such agent in relation to insurance auxiliary services. 21 Specific Cases – Inclusions

Subject to the provisions relating to inclusions aforesaid mentioned, the value of any taxable service, as the case may be, does not include-  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;  The airfare collected by the air travel agent in respect of services provided by him;  The rail fare collected by rail agent in respect of service provided by him;  Interest on loans; and  The taxes levied by any government on any passenger travelling by air, if shown separately on the ticket, or the invoice for such ticket, issued to the passenger Specific Cases – Exclusions 22

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