Whether TDS paid by service recipient includible in the taxable value of service?

PJ/Case Laws/2012-13/1328

Case:-M/S TVS MOTOR COMPANY LTD V/s COMMISSIONER OF CENTRAL EXCISE, CHENNAI-III

Citation:- 2012-TIOL-1639-CESTAT-MAD

Brief Facts:- The Appellant is recipient of technical consultancy and project consultancy services from service providers abroad having no place of business in India for the period from March, 2004 to September, 2007 and such service falls under Consultancy Engineering Service . The appellant paid service tax without including the income tax deducted at source under Income Tax Law to foreign consultant. The adjudicating authority confirmed demand on short payment of service tax, interest on the said service tax and penalty imposed under section 78 of Finance Act, 1994. It is surprising that in this case, Appellant representative have appeared earlier and have obtained waiver of pre-deposit and stay without there being any vakalatnama in their favour. In the absence of a valid vakalatnama, they can neither be allowed to represent the appellants nor can any adjournment request from them be entertained. Hence, the adjournment request was declined. Considering that the appeal is already 3 years old and prayer of Revenue was to expeditiously dispose the appeal due to blockage of crores of rupees of tax and penalty involved in the appeal as well as Appellant’s knowledge of hearing granted by the Miscellaneous order aforesaid, the matter was taken up for hearing with the assistance of Representative for Revenue.

Appellant Contentions:- The appellant contended that the services rendered outside India were not liable to service tax prior to 18.04.2006 in view that no provision in this regard existed to realise service tax from service recipient. Section 66A was incorporated into the statue book with effect from 18.04.2006 to tax the taxable services provided by foreign service providers having no permanent address or usual place of residence in India. They also placed reliance on the decision of Apex Court in Union of India vs Indian National Shipowners Association [2011-TIOL-05-SC-ST]. They also contended that assessable value of Consultancy Engineering Service provided by the foreign consultant shall be exclusive of income tax deducted at source under the levy of service tax as it was obligation of the appellant to make payment to the service provider the engineering consultancy fees net of tax for which the amount actually remitted to the service provider shall be basis of levy.

Respondent Contentions:- The Respondent submits that the Appellant is recipient of technical consultancy and project consultancy services from service providers abroad having no place of business in India and such service falls under Consultancy Engineering Service. The service so received being taxable service under the Act, the recipient was liable to pay service tax in terms of Section 66A of the Act read with Rule 2(1)(d)(v) of the Service Tax Rules, 1994 but here appellant paid service tax on the reduced value of such taxable service without including the income tax deducted at source under Income tax Law to the consultancy fees paid to foreign consultant. That resulted in short payment of service tax for which adjudication was made and that resulted in proper demand by adjudication order. It was categorically submitted by Revenue that there was difference between the value paid to Foreign Service provider and value disclosed in the service tax return giving rise to understatement of gross amount resulting in short payment of service tax. Tax deducted at source under income tax law was not included in gross payment. Therefore, adjudication order which levied service tax on the gross value of taxable service was correct and invocation of proviso to Section 73(1) of the Act was justified that does not call for interference in the present appeal. According tax, interest and penalty levied in adjudication should be upheld.

Reasoning of Judgment:- The Tribunal has perused the case-laws cited. Firstly, the issue as regards improper and invalid Vakalatnama was examined in detail in the light of various case laws and decisions given by the Apex Court. It was held by the Tribunal that in the absence of a valid Vakalatnama by the advocates purported to represent the appellant, they can neither be allowed to represent the appellants nor can any adjournment request from them be entertained. Hence, the adjournment request was declined.

Thereafter, following points were taken up by the Tribunal as none appeared for the appellant:

Service tax liability for normal period covered by show cause notice
The Tribunal Finds appellant appeal memorandum stated that in reply to Show Cause Notice was not within time limit as per rule. There is no quarrel to such proposition since law was not in force prior to 18.4.2006 to bring the appellant to the purview of service tax on the disputed issue following apex court decision in National Ship-owners Association case (supra). Therefore, Appellant shall be liable to tax for the normal period covered by the Show Cause Notice and tax demand with interest if any shall be computable for such period and the adjudication order gets suitably modified to this extent.

Law was not force prior period

The appellant is received services from outside India were not liable to service tax prior to 18.4.2006. Thus the value of service received by the appellant prior to 18.4.2006 shall not be liable to tax and adjudication decision of Apex Court in Union of India Vs Indian National Shipowners Association holding no liability arises against assessee.

Service Tax liability on services received from outside India & Reverse Charge Valuation of service tax

Appellant is recipient services from service providers abroad having no place of business in India and such service falls under Consultancy Engineering Service. The Tribunal refers Show Cause Notice and its indicates that on perusal of the agreement between the appellant and one of the service providers abroad that the price set out in the Consultancy Agreement as was examined by notice issuing authority noticed that to be net of all duties, taxes and other Government charges which, where applicable were payable in addition to the price but no agreement copy was available on record or paper Book. There was no pleading on material facts by the appellant as to how the facts in issue suggest and support defense of appellant that income tax deducted at source shall not form part of the gross amount of taxable service received when Rule 7(1) of Service Tax (Determination of Value) Rules, 2006 provides that actual consideration charged for the service provided or to be provided shall be assessable value in respect of services covered by Section 66A of the Act. The Tribunal finds that appellant paid service tax on exclusive of income tax deducted at source in gross annual value. The Tribunal refers Section 67(1)(a) of the Finance Act, 1994 where there is a monetary consideration paid to provide taxable service, the assessable value for levy of service tax is "gross amount" charged by the Service provider for the taxable service provided & Sub section (2) of the, said section has made provision to include the amount of service tax to the gross value of consideration where taxable service provided is inclusive of service tax. The term "consideration" for the valuation of taxable service is defined under Section 67 that consideration includes any amount that is payable for the taxable service provided or to be provided. The liability of the appellant arose under the Act in terms of Section 66A of the Finance Act, 1994 as recipient of service of Engineering Consultancy from the Consultant abroad. Rule 7 (1) of the Service tax (determination of value) Rules, 2006 which came into force with effect from 19.4.2006 has made provision in respect of services covered by Section 66A of the Act. According to this Rule, value for taxation of service shall be such amount as is equal to the actual consideration charged for the services provided or to be provided.

The Authority may consider such grounds at the time of raising modified demand in accordance with law.

Penalty

Appellant does not understand the laws applicable at inception and date of incidence of taxability and for this reason it would be apt to waive the penalty under section 78 of Finance Act, 1994.

As per the aforesaid discussions it is ordered:-

·         There shall not be levy of service tax on the engineering consultancy services availed from foreign consultant abroad prior to 18.4.2006.
·         There shall be levy of service tax at the applicable rate for the period 18.4.2006 to 30.9.2007 on the gross amount of consideration inclusive of income tax deducted at source involved in availing engineering consultancy service availed under Section 66A of the Act.
·         Cum tax benefit if any admissible shall be granted in accordance with law.
·         There shall not be penalty under section 78 of Finance Act, 1994.

Decision: - Appeal disposed of.

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PJ/Case Laws/2012-13/1328

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