Valuation under
Service Tax Regulation
Mrityunjay Acharjee
AGENDA
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Statutory provisions relating to Valuation of
Taxable Services.
Service Tax (Determination of Value) Rules
Latest amendments in Valuation Rules with
the introduction of ‘Negative List’
Determination of value of service portion in
the execution of a works contract.
VALUATION OF SERVICES

Value of Taxable Service shall be the Gross
amount charged by the service provider for
such services provided or to be provided
rendered by him.
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Tax is payable as soon as advances, if any, is
received
VALUATION OF
TAXABLE SERVICES U/s. 67
Where consideration for providing services is
entirely in money, gross amount charged by
service provider/ to be provided shall be the
value of Service.
Where consideration is not wholly or partly in
terms of money, be such amount in money as,
with the addition of service tax charged, is
equivalent to the consideration
VALUATION OF
TAXABLE SERVICES U/s. 67
Where provision of services is for a
consideration which is not ascertainable, the
value would be determined in the prescribed
manner and as per the Valuation Rules.
VALUATION OF TAXABLE
Where consideration is not wholly or partly in
terms of money ( or value not ascertainable)
Service Tax is payable :
a)
Value of taxable services shall be equivalent to
the Gross amount charged by the Service
Provider to provide similar services to other
persons in ordinary course of trade , where
Gross amount charged is Sole Consideration
b)
In other cases, (not above), Value shall not be
less than the Cost of Provision of such Services
Non-Monetary Consideration
Supply of goods and service in return for provision
of service
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Refraining or forbearing to do an Act in return for
provision of service
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Tolerating an Act or a situation in return for
provision of a service
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Doing or agreeing to do an Act in return for
provision of service
Service Tax is payable on the fair value of nonmonetary consideration, which is equivalent money
value as determined as per Rules.
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PROVISION OF VALUATION U/s. 67
.
Where Service Tax is inclusive and not charged
separately - value shall be determined on back
calculation basis
Gross amount charged shall include any amount
received before / during / after such services
DETERMINATION OF VALUE - RULES
Thee Central Excise / Service Tax Officer can reject
the value determined by the service provider and
determined value separately.
In case of service provided/ to be provided from
outside India, actual consideration received shall be
relevant for valuation
[Rule 7]
PRINCIPLES OF COST ANALYSIS
1.
2.
3.
4.
Determination of Cost of Taxable Services
‘Cost’ would be worked out on the basis of usual
Cost Accounting principles
Certification of Cost / Chartered Accountants for
determination of Cost of Services
Specific Guidelines from ICAI for the purpose of
determination of Cost of Services is needed
PRINCIPLES OF COST ANALYSIS
1.
2.
3.
Value based on Cost of Provision of Services –
where reasonable profit (industry average or 10%)
shall be added on total cost of services
For captive consumption of services – principles
laid down in CAS-4 issued by ICAI and CBEC
Circular No. 692/8/2003 may be followed
All expenditure and cost relating to provision of
service incurred by service provider is includable in
the value – Rule 5(1) – and shall be treated as
consideration for the taxable services
INCLUSION/EXCLUSION FROM VALUE
1.
Where any expenditure/cost has been incurred by the
service provider in the course of providing taxable
service – all such exp. / costs shall be treated as
consideration for taxable service provided / to be
provided and shall be included in the value for the
purpose of charging Service Tax.
1.
Where any expenditure or cost incurred by service
provider as “Pure Agent” of the recipient of service –
such amount shall be excluded, subject to fulfillment
of all eight conditions
VALUE OF TAXABLE SERVICES
Value of the taxable service is the total amount of
consideration consisting of all components of the
taxable service and it is immaterial that the details
of individual components of the total consideration
is indicated separately in the invoice.
In other words, Gross consideration is taxable
(Explanation to Rule 5).
Non-Monetary Consideration
Supply of goods and service in return for provision
of service
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Refraining or forbearing to do an Act in return for
provision of service
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Tolerating an Act or a situation in return for
provision of a service
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Doing or agreeing to do an Act in return for
provision of service
Service Tax is payable on the fair value of nonmonetary consideration, which is equivalent money
value as determined as per Rules.
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PRINCIPLES FOR VALUE DETERMINATION
1.
2.
Circular no. B1/4/2006 – TRU dated 19.04.2006 :“Value for the purposes of charging Service Tax is
the gross amount received as consideration for
provision of service. All expenditure or cost
incurred by the service provider in the course of
providing taxable services forms integral part of the
taxable value and includable. It is not relevant that
various expenditure or cost has separately indicated
in the invoice or bill issued by the service provider
to his client.”
All earlier circulars stands withdrawn
VALUE OF TAXABLE SERVICES
Re-imbursement of expenses incurred on behalf of
client is not includible – Rule 5(2) ‘Glaxo Smithkline Pharma Ltd. Vs. CCE
Deduction available, if conditions for “Pure Agent”
are fulfilled
LIABILITY OF SERVICE RECEIVER – NOT INCLUDIBLE
Re-imbursement of expenses claimed by the service
provider as per agreement, which is a liability of the
service receiver – the same should not be included
in the value –
‘Scott Wilson Kirkpatrick India Ltd. Vs. CCE’
MEANING OF “ PURE AGENT “
Means a person who–
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(a) enters into a contractual agreement with the
recipient of service to act as his pure agent to incur
expenditure or costs in the course of providing
taxable service;
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(b) neither intends to hold nor holds any title to the
goods or services so procured or provided as pure
agent of the recipient of service;
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(c) does not use such goods or services so procured;
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(d) receives only the actual amount incurred to
procure such goods or services
CONDITIONS FOR EXEMPTION AS PURE AGENT
1.
2.
3.
4.
5.
SP acts as a pure agent while making payment of third
party for goods/services procured.
The SR received and uses the goods so procured by
the SP in his capacity as pure agent of SR
The SR is liable to make payment to the third party
The SR authorises the SP to make payment on his
behalf
The SR is aware that the goods and services for which
payment has been made by SP shall be provided by a
third party
CONDITIONS FOR EXEMPTION AS PURE AGENT
6. Payment made by SP on behalf of the SR has been
separately indicated in the invoice issued by the SP
7. The SP recovers from the SR only such amount as has
been paid by him to the third party
8. The goods and services procured by the SP from third
party as pure agent are in addition to the services
provided by him on his own capacity.
VALUATION OF SERVICES – EXAMPLE 1
X contracts with Y, a real estate agent to sell his house and
thereupon Y gives an advertisement in television. Y billed X
including charges for Television advertisement and paid
service tax on the total consideration billed. What would
value of Taxable Services.
In such a case, consideration for the service provided is what
X pays to Y. Y does not act as an agent behalf of X when
obtaining the television advertisement even if the cost of
television advertisement is mentioned separately in the
invoice issued by X. Advertising service is an input service
for the estate agent in order to enable or facilitate him to
perform his services as an estate agent
VALUATION OF SERVICES – EXAMPLE 2
In the course of providing a taxable service, a service
provider incurs costs such as traveling expenses, postage,
telephone, etc., and may indicate these items separately on
the invoice issued to the recipient of service. What would be
the value of taxable services.
In such a case, the service provider is not acting as an agent
of the recipient of service but procures such inputs or input
service on his own account for providing the taxable service.
Such expenses do not become reimbursable expenditure
merely because they are indicated separately in the invoice
issued by the service provider to the recipient of service.
VALUATION OF SERVICES – EXAMPLE 3
A contracts with B, an architect for building a house. During
the course of providing the taxable service, B incurs
expenses such as telephone charges, air travel tickets, hotel
accommodation, etc., to enable him to effectively perform
the provision of services to A.
In such a case, in whatever form B recovers such expenditure
from A, whether as a separately itemised expense or as part
of an inclusive overall fee, service tax is payable on the total
amount charged by B. Value of the taxable service for
charging service tax is what A pays to B. .
VALUATION OF SERVICES – EXAMPLE 4
Company X provides a taxable service of rent-a-cab by
providing chauffeur-driven cars for overseas visitors. The
chauffeur is given a lump sum amount to cover his food and
overnight accommodation and any other incidental expenses
such as parking fees by the Company X during the tour. At
the end of the tour, the chauffeur returns the balance of the
amount with a statement of his expenses and the relevant
bills. Company X charges these amounts from the recipients
of service.
The cost incurred by the chauffeur and billed to the recipient
of service constitutes part of gross amount charged for the
provision of services by the company X.
NO SERVICE TAX ON FREE SERVICE
1.
1.
If service is provided free of charges – No Service
Tax is payable – ‘Bharti Cellular Ltd. Vs. CCE
Free Service provided by authorised vehicle service
stations (at the time of sale) for which no payment is
received from anyone and price is included in sale
price of such vehicle, the same could not be
subjected to Service Tax - “Indus Motor Company
vs. CCE(2008)
LEVY OF SERVICE TAX AND EXCISE DUTY
LEVY OF
SERVICE TAX
ON
INDIVISIBLE CONTRACTS
LEVY OF SERVICE TAX AND EXCISE DUTY
Though, Service Tax and Excise Duty, both
independent taxes, in certain situation ST is payable
even ED has been paid on the same amount.
Lincoln Helios India Ltd. Vs CCE,
it was held that Service Tax is payable in erecting
and commissioning charges even if excise Duty has
been paid on entire value of contract including
erection and commissioning
VALUATION – INDIVISIBLE CONTRACTS
1.
If such service is covered under ‘Works Contract
Service’ – valuation shall as per Rule 2A of
Valuation Rules [Amended through Notification No
24 of 2012 dated 6th June 2012 ]
2. In other cases – value of the goods can’t be included
in the value of services
- Bharat Sanchar Nigam ltd. Vs. UOI
- Imagic Creative Pvt. Ltd Vs. CCT
VALUATION OF SERVICES
LEVY OF
SERVICE TAX
ON
WORKS CONTRACT
Notification No 24 of 2012 dt 6 June 2012
Determination of Value in Works Contract
as notified by Notification
No 24 of 2012 dt 6 June 2012
‘Works contract’ has been defined in section 65B(54) to mean a contract
wherein transfer of property in goods involved in the execution of such
contract is levyable to tax as sale of goods and such contract is for the
purpose of carrying out construction, erection, commissioning,
installation, completion, fitting out, improvement, repair, renovation,
alteration of any building or structure on land or for carrying out any
other similar activity or part thereof in relation to any building or
structure.
Value of taxable service is also determined in accordance with ‘Service
Tax (Determination of value)’ Rules, 2012 as amended from time to time.
The amended Service tax (Determination of value)’ Rules, 2012 shall
be effective from 01.07.2012 [vide notification no 24/2012 dated 06.06.12].
VALUATION OF SERVICES – WORKS CONTRACT
Where Value Added Tax, has been paid on the
actual value of transfer of property in goods
involved in the execution of the works contract,
such value adopted for the purposes of payment of
VAT, 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.
Determination of Value in Works Contract
Value of works contract as per amended Rule for valuation of taxable
Services in the execution of a works contract (from 01.07.2012) includes
the followings :
(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;
Determination of Value in Works Contract
Value of service portion in the execution of a works contract
[section 66E(h)] shall be equivalent to the gross amount
charged for the works contract less the value of property in
goods transferred in the execution of the said works contract.
Where VAT/Sales Tax has been paid or payable on the
actual value of property in goods transferred in the execution
of the works contract, such value adopted for the purposes of
payment of VAT/Sales Tax, shall be taken as the value of
property in goods transferred in the execution of the said
works contract for determination of the value of service
portion in the execution of works contract.
Determination of Value of Works Contract
in other cases
Where the value could not been determined as above, the amount
of service tax payable shall be :
Works Contract relating to …..
For execution of original works.
“original works” means and includes all new constructions, all types of additions
and alterations to abandoned or damaged
structures to make them workable, erection,
commissioning or installation of plant,
machinery or equipment or structures, whether
pre-fabricated or otherwise
Taxable portion as a %
of the total amount
40% of total amount
charged for the Works
Contract.
( i.e, 12.36% on 40%)
For maintenance or repair or reconditioning or 70% of total amount
restoration or servicing of any goods,
charged for the Works
Contract
For any other contract (other than above) 60% of total amount
including maintenance, repair, finishing services charged for the Works
like glazing etc., installation of electrical fittings Contract
etc
Determination of Value of Works Contract
in other cases
“Total Amount” for the contracts shall be the sum total of
gross amount charged plus the fair market value of all goods
and services supplied in or in relation to the execution of the
same contract, or any other contract, after deducting the
amount charged for such goods or services and the
VAT/Sales Tax levied thereon.
“Fair Market” value of goods and services shall be
determined in accordance with generally accepted accounting
principles.
CENVAT Credit - Works Contract
Services
The Provider of taxable service could not take
CENVAT credit of duties/cess paid on any inputs
used in or in relation to the said works contract.
However, credit in respect of taxes paid on capital
goods and input services shall be available.
Credit in respect of taxes paid on capital goods and
input services shall also be available in those cases
where taxable value is determined on Specified
percentage basis.
Value of Works Contract
Question
Would labour contract in relation to building or
structure is treated as works contract?
No. Labour contract do not fall in the definition
of works contract. There should be a transfer of
property in goods involved in the execution of
works scontract which is leviable to VAT.
Pure labour contract is not a works contract and
would be leviable to Service Tax like any other
service on its full value of consideration.
Value of Works Contract
Question :
Would contracts for tailoring of clothes or development of
photographs also be treated as works contracts as these are
also for carrying out a particular work?
No. The phrase used is ‘works contract’ and not work contract.
‘Works’ has a defined and accepted legal meaning. As per
Black’s Law dictionary ‘works’ means ‘buildings or structures
on land’. Moreover works contract has been defined in the Act as
contract for carrying out specified activity, like construction,
erection, commissioning, installation, completion, fitting out,
improvement, repair, renovation, alteration etc., or a part thereof
in relation to any building or structure on land. Therefore
contracts which do not pertain to building or structures on land
would be out of the ambit of works contracts .
Value of Works Contract
Question :
Would contracts for construction of a pipe-line or
conduit be covered under works contract?
Yes. As pipeline or conduits are structures on land
contracts for construction of such structure would be
covered under works contract
Value of Works Contract
Question :
Would contracts for erection commissioning or
installation of plant, machinery, equipment or
structures, whether prefabricated or otherwise be
treated as a works contract?
Such contracts would be treated as works contracts if –
Transfer of property in goods is involved in such a
contract; and
The machinery equipment structures are attached or
embedded to earth after erection commissioning or
installation.
Value of Works Contract
What is the scope of ‘building or structure on land’?
Buildings and structures on land means not only
buildings or structures attached to earth but also things
permanently fastened to a building or structure attached
to earth. Hence covered under Works Contract
Would contracts for painting of a building, repair of
a building, renovation of a building, wall tiling,
flooring be covered under ‘works contract’?
Yes, if such contracts involve provision of materials as
well.
Determination of value of service involved in supply
of food or any article of human consumption
Determination of value of taxable service involved in supply of food and
drinks in any restaurant or as outdoor catering.
Description
Taxable portion as a %
of the total amount
Service portion in the supply of food or any
other article of human consumption or any
drink (whether or not intoxicating), at a
restaurant
40%
Service portion in outdoor catering supply of
food or any other article of human
consumption or any drink (whether or not
intoxicating),
60%
Total amount” means the sum total of the gross amount charged and the fair market
value of all goods and services supplied in or in relation to the supply of
food/drinks whether or not supplied under the same contract or any other
contract, after deducting therefrom, the amount charged for such goods or
services, if any; and the amount VAT/Sales Tax levied thereon
VALUATION – INDIVISIBLE CONTRACTS
1.
2.
3.
Service Tax is payable on value of services and not
on the value of the material/input used while
providing service
Notification no. 12/2003-ST- if amount charged
includes value of goods and material sold, Service
Tax will not be payable on value of such goods and
material
In case of AMC, if Sales Tax has been paid on
components and parts, Service Tax would not be
payable on that value. – ‘Kone Elevators Ltd. Vs.
CST’
VALUATION OF SERVICES
Elements to be
Included for
Determining
Taxable Value
VALUATION OF SERVICES – TO INCLUDE
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
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;
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;
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;
The commission or any amount received by the rail travel agent
from the Railways or the customer;
VALUATION OF SERVICES – TO INCLUDE
(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.Company X provides a taxable service of rent-a-cab by
providing chauffeur-driven cars for overseas visitors. The chauffeur
is given a lump sum amount to cover his food and overnight
accommodation and any other incidental expenses such as parking
fees by the Company X during the tour. At the end of the tour, the
chauffeur returns the balance of the amount with a statement of his
expenses and the relevant bills. Company X charges these amounts
from the recipients of service.
The cost incurred by the chauffeur and billed to the recipient of
service constitutes part of gross amount charged for the provision of
services by the company X.
SPECIFIC EXCLUSION FROM VALUE
1.
2.
3.
4.
5.
Initial deposit made by the subscriber as the time of
application for telephone connection or pager or facsimile
(FAX) or telegraph or telex or for leased circuit
The airfare collected by air travel agent in respect of service
provided by him
The rail fare collected by [rail] travel agent in respect of
service3 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
OTHER RELEVANT ISSUES
The existing provisions relating to positive list approach
of taxing services under sections 65, 65A, 66, and 66A,
which inter-alia include definition of ‘taxable service’,
classification Reverse charge, [u/s. 66A], shall not be
applicable from 01.07.2012. (18/2012- 01.06.2012)
Newly inserted Section 65B (effective from 01.07.2012)
provides definitions relating to Service Tax which
inter-alia includes the definition of ‘Service’, ‘Support
Service’, ‘Taxable Service’, ‘Negative List’ etc.
[notification no 19/2012 dated 05.06.2012].
Determination of value of services
In accordance with Rule 3 of the valuation Rules, where the value of services
is not ascertainable, the same shall be determined in the following manner:
a) The value of such taxable service shall be equivalent to the gross amount
charged by the service provider for similar service to any other person in
the ordinary course of business where such gross amount is the sole
consideration.
b) If the value could not be determined as above, cost of provision of such
taxable service would be considered as equivalent money value of such
services.
The value of taxable services shall also include any amount realised as
demurrage or by any other name whatever called for the provision of a service
beyond the period originally contracted or in any other manner relatable to the
provision of service.
4/13/2015