WIRC of ICAI Indirect Tax Refresher Course- Classification and Valuation CA Bharat Shemlani 27/08/2011
Classification of Service: Section 65A(1) provides that classification of taxable service shall be determined according to the terms of the definition of taxable services prescribed in the various sub clauses of Section 65(105). In case a service is prima facie taxable under two or more categories, the basic principles of classification as provided in Section 65A (2) are as follows: (a) The category which provides most specific description to be preferred to a category providing a more general description; (b) Composite services consisting of a combination of different services, which cannot be classified in a manner specified in clause (a) above, to be classified under the category which gives them their essential character; 2
Classification of Service: ( c) Where the first two principles i.e. (a) and (b) above fail, the classification will be done under the category, which occurs first in the statute, that is, which defines taxable service amongst those categories, which merit equal consideration. For instance, if there is a dispute about a particular service as to whether it should be classified under Mandap keeper service or Convention service and the principles of classification stated in (a) and (b) above fails, then the said service would be taxable as Mandap keeper as same is occurring first in the statute i.e. sub clause (m) appears before sub clause (zc) in Section 65 (105) of the Act and was taxable w.e.f. 01.07.1997 as against convention service w.e.f. 16.07.2001. 3
Classification of Service: Exception to above Principle; Major Port and Other Port Service Airport Service 4
Classification of Service: INDIAN NATIONAL SHIPOWNERS ASSOCIATION - 2009 (14) STR 289 (Bom.) Tax liability (Service tax) - New services - Introduction of new entry and inclusion of certain services in that entry presupposes that there was no earlier entry covering such services - Section 66 of Finance Act, 1994. [para 38] Supply of Tangible Goods service - Mining service - Creation of new entry for Supply of Tangible Goods service not by amending earlier entry on Mining service and not by carving out of Mining service - Providing vessels on time charter basis without giving effective control not covered under Mining service - Sections 65(105)(zzzy) and 65(105)(zzzzj) of Finance Act, 1994 Affirmed by SC in 2011 (21) STR 3 (SC) 5
Classification of Service: Instrumentation Ltd. vs. CCE, Jaipur-I 2011 (23) STR 221 (Tri-Del.) The Tribunal in this case held that Erection, Installation or Commissioning service, Commercial or Industrial Construction service and Residential Construction service which involve transfer of property in goods on which tax as sale of goods is leviable is liable to service tax even prior to introduction of Works Contract service w.e.f. 01/06/2007. Works Contract composition scheme and valuation rules only provides a new machinery provision for assessment of Service tax on contract involving transfer of property in goods on which sales tax/vat is chargeable. 6
Valuation of Service: Position effective from 18.04.2006 The salient features of section 67 are as follows; Where the consideration received for provision of service is wholly in money, the value shall be the gross amount charged by the service provider for provision of such service. Where the consideration received for provision of service is not wholly consisting of money, the value in such cases shall be the gross amount charged by the service provider for provision of similar service to any other person in the ordinary course of trade. If the value of similar service provided by the same service provider is not available then the value has to be determined. 7
Valuation of Service: Consideration includes any amount that is payable for the taxable services provided or to be provided; 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; 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. 8
Valuation of Service: The service provider should determine money value of nonmonetary consideration received. If the consideration received is not wholly consisting of money, equivalent money value of the consideration determined by the service provider shall be the taxable value for charging service tax. If the consideration received is partly in money and partly in non-monetary terms, the sum of consideration received in money and the equivalent money value of the non-monetary consideration determined by the service provider shall be the taxable value for charging service tax. The service provider shall determine the taxable value but the value so determined for the purpose of paying service tax should not be less than the cost of provision of such service. 9
Valuation of Service: Thus, section 67 and rules issued for this purpose enables charging of service tax in cases where the consideration received is not in money terms. Where the service tax is charged on the basis of similar service provided by the same person, the same should be based on normal transaction between two independent persons at an arm s length price. The value determined by the service provider for the purpose of payment of service tax should not be less than the cost of provision of such service, however, where there are adequate reasons warranting verification of the value adopted by the service provider for payment of service tax, Rule 4(2) specifically enables verification of records of such cases by Central Excise Officer (CEO). 10
Valuation of Service: This enabling power granted to CEO is to be used by him with extreme caution. Such verification is to be done after the written instructions from Divisional DC/AC. After verification, if the department is of the view that the value so determined and adopted for payment of service tax warrants revision, the Show Cause Notice would be issued after obtaining concurrence of Divisional Commissioner. 11
Valuation of Service: Reimbursable expenditure: Rule 5 of the Valuation Rules provides that when any expenditure or cost are incurred by a service provider, in the course of providing taxable service, all such expenditure/cost will form integral part of taxable value for charging service tax irrespective of whether the same are included in the gross value charged by the service provider or otherwise. This provision is in contrast to the earlier stand of the department in respect of out of pocket expenses like traveling, hotel stay, boarding etc. 12
Valuation of Service: In all examples provided in Rules, it is provided that, service tax is required to be paid in terms of the Rule 5 as the expenses are incurred in the course of provision service. (Surprisingly all examples are given for inclusion only and not a single example for exclusion). An exception is provided to the above provisions, wherein it is provided that when expenditure/cost are incurred as a Pure Agent of the client, it will not form part of the value for charging service tax subject to certain conditions. 13
Valuation of Service: Pure Agent as defined is a person who enters into a contract with the recipient of his service to act as pure agent to incur expense/cost while providing service; one who does not intend to hold any title to goods or services procured or provided by him and one who does not use himself goods or services procured and receives only actual amount incurred to procure such goods or services. The conditions to be fulfilled are as follows; Service provider acts as a pure agent of the recipient of service when he makes payment to any third party, The recipient of service receives and uses the goods/services so procured, The recipient of service is liable to make payment to third party and he authorises the service provider to make payment on his behalf and he has the knowledge that goods/service for, which payment is made are provided by third party. The payment made is indicated in the bill separately by the service provider and recovered on actual basis only, The service provider procures the third party services or goods in addition to providing his own service. 14
Valuation of Service: It is pertinent to note that all the components of a taxable service are includible in the value on which service tax is chargeable and it is immaterial even if they are separately indicated in the invoice. It is further clarified by the Board that whether the expenditure or cost incurred by the service provider in his capacity as pure agent of the client or incurred on his own account is a question of fact and law and is to be determined carefully. In case of taxable service provided from outside India and received in India the total consideration paid by the recipient for such service including the value of service paid for service, partly performed outside India will become value of taxable service and service tax will be charged accordingly. In view of comprehensive provisions on value of taxable service, all the circulars issued earlier relating to value of taxable service are withdrawn. 15
Valuation of Service: Specific Inclusions; (i) the 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. 16
Valuation of Service: Specific Exclusions; (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 rail travel agent in respect of service provided by him; and (iv) interest on loans. [(v) 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. 17
Deduction/Abatement Exclusion of value of goods sold during provision of service subject to condition that no cenvat credit is availed on inputs & capital goods : - Notification No. 12/2003-ST Abatement/Adhoc deduction provided in respect of certain services subject to the condition that no cenvat credit is availed on inputs, capital goods and input services- Notification No. 1/2006-ST Value of service Free supply of Material by Recipient of Service to be added while availing exemption u/n 1/2006-ST and while paying tax under composition under WC service. Taxes such as VAT, Luxury Tax etc. to be excluded. 18
Recent Clarifications Circular No. 96/7/2007 at para 002.01 clarified that an amount collected for delayed payment of a telephone bill is not to be treated as consideration charged for provision of telecom service and therefore, does not form a part of the value of taxable service. Circular No. 121/02/2010 - ST dated 26.4.2010 clarified that detention charges in respect of detained containers are not in respect of service provided on behalf of client (under BAS) nor is it on account of infrastructure support services (under BSS). Such charges can at best be called as 'penal rent' for retaining the containers beyond the predetermined period. Therefore, the amount collected as 'detention charges' is not chargeable to service tax. Circular No. 137/25/2011 - ST dated 03/08/2011 clarified Delayed payment charges received by the stock brokers are not includible in taxable value as the same are not the charges for providing taxable services. Such charges are on account of delay in making payments by the service recipient to the service provider and are in the nature of a penal charge for not making the payment within stipulated time. Such amounts are not includible in the taxable value for charging service tax. This principle will also apply to other service providers. 19
Case Laws Free Service : Cultural Society of Angamally v/s. CCE, Cochin (2008) 13 STT 227 (Cestat, Bangalore). Donation received out of free will and public grants could not be considered to be part of Value of Taxable Service. 20
Case Laws CEMEX ENGINEERS 2010 (17) STR 534 (Tri. - Bang.) Valuation - Material cost - Service tax paid after availing abatement for construction services under relevant notifications - Value of materials supplied sought to be included - High Court in 2007 (7) S.T.R. 123 (Mad.) interpreted explanation in exemption notification to mean that value of goods supplied and provided by client not includible in taxable value - Taxable value shall be gross amount charged for service and cost of materials not covered - Section 67 of Finance Act, 1994. 21
Case Laws Jaihind Projects Ltd. 2010 (18) STR 650 (T- Ahmd.) The Tribunal denied abatement of value of pipes supplied free of cost by the service recipient holding that Section 67 provided for inclusion of both monetary and non-monetary consideration in the taxable value. Pipes supplied free of cost by the service recipient was an essential component required for providing pipeline laying service and pipes had to be treated as non-monetary consideration forming part of taxable value. 22
Case Laws Team S&S 2011 (21) STR 290 (T-Del.) It is held that expense reimbursed could not be excluded from gross value of taxable service. Gross value took into its fold entire cost of service enabling the service to be performable. Therefore, by no stretch of imagination neither the arrangement of the parties, nor their mutuality or nomenclature or format of their agreement and mode of discharge of consideration shall prevail on the law relating to service tax. Legislature accordingly intend that the gross value of the service shall be the measure of value for taxation whether paid as consideration directly or by reimbursement of expenses relating to providing of taxable service. 23
Case Laws Agrawal Colour Advance Photo System 2010 (19) STR 181 (T-Del.) In this case, dealing with the taxable value of photography service, the Tribunal held that gross amount charged by service provider included value of labour and skill and cost of inputs and input services where service was the dominant object of the contract. Value of all materials and goods used or consumed for providing service was includible in the value of assessment and no deduction is allowed for value of photographic paper, chemicals used for providing service. (referred to Larger Bench) 24
Case Laws COUNTRY CLUB (INDIA) LTD. 2011 (21) S.T.R. 445 (Tri. - Bang.) Valuation - Club or Association service - Membership with land and cost of land also collected from members - Individuals applying for membership with land allotted by sister concern - Contention that cost of land transferred to sister concern hence not includible in value - C.B.E. & C. Circular dated 27-7-2005 indicating that amount charged for sale of items not taxable provided documents evidencing such sales available - Finding needs to be recorded on factual position of transfer of amounts to sister concern after verification from books of account - Matter remanded - Section 67 of Finance Act, 1994. - Appellant s case is on a more stronger footing, if they are able to demonstrate that the amount on which the lower authorities are seeking service tax, has been actually transferred to their sister concern, then the Board s circular would apply and binding on the Revenue officers. 25
Case Laws Grand Ashok [2011] 12 taxmann.com 78 (Kar.) Outdoor caterer's service - Period 10-9-2004 to 31-3-2006 - Assessee was engaged in providing outdoor catering services to airlines - It availed exemption under Notification No. 12/2003, dated 20-6-2003 in respect of value of food and beverages served to airlines on which VAT was paid - It claimed that element of service in connection with catering was only to extent of handling and loading of food and beverages on aircraft and, accordingly, paid service tax on amount realized for same - Adjudicating authority held that assessee was liable to pay service tax on gross amount realized from various airlines - Accordingly, denying said exemption he confirmed demand - Tribunal allowed assessee's appeal on ground that it had issued separate invoices for food and beverages and was paid separately for same, hence food supplied should be treated as sale of goods and no service tax could be levied on value of food and beverages - Division Bench of Karnataka High Court in WA Nos. 671 to 726/2011, dated 18-4-2011 held that outdoor catering is a composite contract which falls under sub-clause (f) of clause 29-A of article 366 of Constitution of India and service tax is payable on service aspect and sales tax is payable on deemed sales aspect and it is not an indivisible contract - Whether in view of above judgment, Tribunal was right in allowing assessee's appeal. 26
Case Laws SAYAJI HOTEL LTD. 2010 (20) STR 485 (Tri-Del.) Stay/Dispensation of pre-deposit - Valuation - Abatement under Notification No. 12/2003-S.T. - Mandap Keeper service rendered - Allegation that bills split relating to services rendered as Mandap Keeper and catering and invoice showing sale of goods absent - Levy of sales tax or VAT on value of food provided by mandap keeper not affects levy of Service tax on catering service as per abatement provided - Abatement under said notification admissible if documentary proof indicating value of goods sold produced - Prima facie service element of catering escaped taxation as bills split for catering and Mandap Keeper service - Prima facie Revenue s contention that Notification No. 1/2006-S.T. applicable, having merit - Modus operandi adopted by appellant questionable and the same caused revenue loss - Service aspect of catering taxable - Predeposit of Rs. 60 lakhs directed - Pre-deposit of balance amounts waived - Section 35F of Central Excise Act, 1944 as applicable to Service tax vide Section 83 of Finance Act, 1994. 27
Case Laws ITW INDIA LIMITED 2011 (23) S.T.R. 159 (Tri. - Ahmd.) Financial leasing services - Valuation - Service tax in case of financial leasing services is leviable only on lease management fee/processing fee and documentation charges and on finances/interest charges and not on principal amount - Since Service tax confirmed on entire principal amount, impugned order set aside and matter remanded to original authority for quantifying Service tax, in terms of Board s Circular F.No. B 11/1/2001-TRU, dated 9-7-2001 - Section 67 of Finance Act, 1994. 28
Case Laws IDEA MOBILE COMMUNICATION LTD. 2010 (19) STR 18 (Ker.) Valuation - Inclusions - SIM card given to mobile phone subscribers - Sales tax authorities dropped proceedings to levy sales tax against other service providers and different stand cannot be taken against present respondent - Assessment for sales tax on sale value of SIM card not permissible - Service connection cannot be given without activation of SIM card - Customer cannot get service without SIM card - SIM card is an essential part of service - SIM card has no intrinsic value or purpose other than use in mobile phones - Plea by other service providers that SIM cards not sold but supplied as part of service, acceptable - Value of SIM card supplied by respondent includible in taxable value for Service tax - Dispute bona fide and settled based on Supreme Court s observations and penalty not imposable - Sections 67, 73 and 76 of Finance Act, 1994 Affirmed by Supreme Court. 29
Thank You Who Speaks Sows But Who Listens Reaps 30