Chapter 8
Value of Taxable Services
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Highlights of the provisions for valuation of taxable services
effective from 18-04-2006
Taxable value of services includes both monetary as well as non-monetary consideration
In case non-monetary consideration is involved, the taxable value of services to be
ascertained according to the given criteria, and the Central Excise Officer has power to
question
the
taxable
value
of
services
and
re-determine the same
Taxable value of services imported in India is the amount of actual consideration
charged/paid
Value of Services involved in the execution of Works Contract is gross amount charged for
the Works Contract less the value of transfer of property in goods involved
Expenses incurred for the purposes of provision of services (typically out of pocket
expenses) are includible in the taxable value of services
Expenses incurred as a pure agent of the recipient of services are excludible from the taxable
value of services if certain conditions are satisfied
Indicating separate components of value on invoice is immaterial to determine the taxable
value
Specified items are to be included/excluded from the taxable value of specific services
The Finance Act, 2006, w.e.f. 18-04-2006, brought major changes in the principles of
determination of value of taxable services. The Service Tax (Determination of Value) Rules,
2006 (“Valuation Rules”), were also brought into force with effect from 19-04-2006 which
provided for the methodology for determination of the value of taxable services where the
consideration comprises of non-monetary elements as well. From the same date, all circulars
issued relating to value of taxable services had been 1withdrawn in view of the comprehensive
new provisions on value of taxable services. In the following chapter, valuation principles as
they are effective after the above changes and as they stood prior to these changes, and also such
1. Vide CBEC Instruction Letter (B1/4/2006-TRU), dated 19-04-2006. The CBEC Circular No. 93/4/2007, dated 10-05-2007 reiterates
that in all cases the value of a taxable service is to be determined strictly in terms of the Service Tax (Determination of Value)
Rules, 2006 read with Section 67 of the Finance Act, 1994, regardless of the circulars relating to the issue of valuation.
general principles of valuation, which fit in the scheme of valuation of services, both post and
prior to 18-04-2006 have been discussed.
A. PROVISIONS FOR VALUATION OF TAXABLE SERVICES EFFECTIVE FROM
18-04-2006
1. Value of taxable service
 Taxable value can be monetary or non-monetary
 Gross amount charged by service provider includes service tax
 Value of service received in advance forms part of taxable value
Taxable value can be monetary or non-monetary: The new provisions include both monetary
and non-monetary consideration in the taxable value of service. New Section 67 envisages three
kinds of situations wherein taxable value of service may have to be determined:
(i) Where the provision of service is for a consideration in money, taxable value of service is
the gross amount charged by the service provider for such service provided or to be provided by
him. [Section 67(1)(i)]
“Money” includes any currency, cheque, promissory note, letter of credit, draft, pay order,
traveller‟s 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, 2[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.]
*For discussion on service tax payments to be made by associated enterprise, please refer
Chapter 9 on payment of service tax.
(ii) Where the provision of service is for a consideration not wholly or partly consisting of
money, the taxable value is such amount in money as, with the addition of service tax charged,
is equivalent to the consideration. [Section 67(1)(ii)]
“Consideration” includes any amount that is payable for the taxable services provided or to be
provided. It may be noted that the definition of consideration is inclusive and not exhaustive.
Section 2(d) of the Indian Contract Act, 1872, defines consideration as follows: “when at the
desire of the promisor, the promisee or any other person has done or abstained from doing, or
does or abstains from doing, something, such act or abstinence or promise, is called a
consideration for the promise”.
(iii) Where the provision of service is for a consideration which is not ascertainable, taxable
value of service is the amount as may be determined in the prescribed manner. [Section
67(1)(iii)]
A typical example of such a situation may be a case where a person provides bundle of services
without specifying separate consideration. No manner has been prescribed for determination of
taxable value in such cases as yet.
Gross amount charged by service provider includes amount of service tax: As per Section
67(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. Thus, where in
the bill a service provider indicates only the gross amount charged which includes both value of
taxable service and the service tax payable thereon, the value of taxable service shall be such
amount as with the addition of tax payable is equal to the gross amount indicated in the bill. In
other words value of taxable service will be determined with the help of “back calculations” as is
done in the case cum-tax price.
2. These words are included in the definition of gross amount vide the Finance Act, 2008, w.e.f. 10-05-2008.
Advance received before provision of service, continues to be taxable: As per Section 67(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. Accordingly, any payment
received for the taxable service, whether rendered or to be rendered becomes taxable in the hands
of the assessee at the time of receipt. In other words, a person is liable to pay the tax as soon as
the consideration towards the taxable services is received. Such provision was first made
effective from 13-05-2005 and the new provisions have retained it in the same form.
2. Determination of monetary equivalent of non-monetary value of taxable service
Rule 3 of the Valuation Rules provides the manner of determining taxable value of services in
case it includes non-monetary consideration. CBEC Instruction Letter (F. No. B1/4/2006-TRU),
dated 19-04-2006 also provides some clarifications in this regard. A combined reading thereof
leads to the following inferences:
 The value of service shall be the gross amount charged by the service provider as sole
consideration for provision of similar service to any other person in the ordinary course of
trade. [Rule 3(a)]
 Where the service tax is charged on the basis of similar services provided by the same
person, the same should be based on a normal transaction between two independent
persons at an arm‟s length price. [CBEC Letter (F. No. B1/4/2006-TRU), dated 19-042006]
 Where the value cannot be determined as above, 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.
[Rule 3(b)]
As per the above provisions, the monetary taxable value of a service for which consideration
includes non-monetary element, is equivalent to either of the two values derived on the following
basis:
1. Gross amount charged for a similar service provided by the same person as sole
consideration in the ordinary course of trade, which is not less than the cost of provision
of such service, or
2. Cost of provision of such service
For the above purposes “Gross amount charged” refers to the amount charged in the form of
money or a derivative of money as defined under explanation to Section 67 and “Sole
consideration” signifies that the gross amount charged for such service constitutes complete
consideration.
Further, by plain logic, the term “similar service” refers to a service of similar description
provided under similar circumstances. However, the said expression has not been defined under
the law. Neither there is any relevant judgment on the issue. There are judgments in relation to
the expression “similar goods”,
for example, the Supreme Court in the case of Nat Steel
Equipment (P) Ltd. v. CCE3, stated that: “...The expression „similar‟ is a significant expression.
It does not mean identical but it means corresponding to or resembling to in many respects;
somewhat like; or having a general likeness. The statute does not contemplate that goods classed
under the words of „similar description‟ shall be in all respects the same. If it did, these words
would be unnecessary….” However, the criteria to determine similar goods may not be
justifiably used to determine similar services in many cases. Thus, in the absence of the
definition of the term “similar service”, determination of monetary equivalent of non-monetary
value remains an arguable issue.
Further, services being so disparately charged by different service providers, its value with
respect to one service provider cannot be fairly ascertained with respect to the other. Therefore,
valuation rules seek to value similar service provided by the same service provider for the
purpose of ascertaining monetary value of a service.
3. (1988) 34 ELT 8.
The stipulation of the similar service being provided in ordinary course of business brings in the
concept of independent persons and arm‟s length price, which in substance refers to the
transaction between two unrelated parties.
As the Government envisaged the practical difficulties in ascertaining the value of similar
service, it provided alternate criteria to value the service on the basis of its cost. However, there
is no commonly agreed formula for determining the cost of provision of services, as to whether it
would be on the basis of full costs comprising both direct and indirect costs or whether it would
only extend to direct costs incurred for providing the services. This is particularly true in relation
to determination of the costs of services, as opposed to determining the cost of supply of goods.
Therefore, although the valuation rules have provided two alternate criteria to value a nonmonetary consideration, however, the existing provisions in this regard are not adequate to take
care of this aspect. A connected problem is the determination of the time of payment of the
service tax in such situations since the payment of the service tax is only required upon receipt of
the value of the consideration for providing taxable services. Now, in a situation of determination
of consideration through the above methodology, it is not clear as to how the determination of
the receipt of consideration at a point in time will be done so as to require the payment of the
service tax.
3. Value of taxable service imported in India
Section 66A of the Act read with the Taxation of Services (Provided from Outside India and
Received in India) Rules, 2006 (hereinafter referred as “Import Rules”), seeks to tax such
services as are provided from outside India and received in India.
Rule 7 of the Valuation Rules provide for the manner of determination of taxable value in case of
services imported in India under Section 66A. According to the said rule,
 the taxable value of service imported in India is such amount as is equal to the actual
consideration charged for the services provided or to be provided
 in case of such services mentioned under Rule 3(ii) of the Import of Services Rules,
which are partly performed in India, the value of taxable service shall be the total
consideration paid by the recipient for such services including the value of service
partly performed outside India
The significance of the expressions “actual consideration charged” and “total consideration paid”
seems to be that in case of import of services, it is only monetary consideration which constitutes
taxable value of service.
4. Value of taxable service of execution of works contract
Rule 2A of Service Tax (Determination of Value) Rules, 2006 4 provides that value of works
contract service shall be equivalent to the gross amount charged for the works contract less
the value of transfer of property in goods involved in the execution of the said works contract.
Wherever the service provider maintains records, the value of services shall be the gross amount
charged for the works contract less the value of transfer of property in goods involved in the
execution of the works contract. It has also been explained that value of works contract service
shall include:
(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, the property in which is not transferred in the course of execution of a works
contract;
4. Ins. by Notification No. 29/2007-ST, dated 22-05-2007 (w.e.f. 01-06-2007).
(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;
Wherever VAT/sales tax on transfer of property in goods involved in the execution of works
contract is paid on actual value, the same value is also taken for the purpose of determining the
value of works contract service. In other cases, value of works contract service shall be
determined based on the actuals.
If the gross amount charged for the works contract is inclusive of VAT or sales tax, the value for
the purposes of service tax shall be computed as follows:
Gross amount charged—(Value of transfer of property in goods involved in the execution of
works contract and VAT or sales tax paid, if any, on the said transfer of property in goods
involved in the execution of the said works contract).
Alternatively, the assessee may opt for composition scheme to pay service tax under Works
Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 (referred as
Composition Rules). Under this scheme, the service provider has an option to pay 4% service tax
on full value of the contract rather than paying 10% service tax on the gross value of the contract
computed as per Rule 2A of the Valuation Rules. Recently, the Government has made an
amendment in the Composition Rules in relation to the computation of Gross Value of service
for the purposes of availing composition scheme. In this regard, CBEC Instruction Letter
(D.O.F. No. 334/13/2009-TRU), dated 06-07-2009, has clarified that, “These rules provide a
simplified procedure for working out the tax liability by the service providers providing works
contract service. Instead of working out the service element from the value of works contract and
paying service tax at full rate (i.e. 10%) the service provider is allowed to pay 4% on the “gross
amount charged” for the works contract. The reason for prescribing the lower rate under the
scheme is that the service provider need not bifurcate the gross value of works contract. It was
expected that the gross value should be shown to include the total value of materials as well as
services used in providing the taxable services. However, it has been reported that in certain
cases, the taxpayers are not including the full value of the goods required for execution of works
contract for working out service tax liability under the composition scheme by either excluding
the value of goods received free of cost from their client or splitting the contract into a sale
contract (for a portion of goods required to execute the works contract) and works contract (for
only a portion of the total value of goods and the labour charges), thus reducing the value of
works contract for the purposes of calculating service tax. In order to plug this loophole, the
Explanation appearing in sub-rule (3) is being amended to provide that the composition scheme
would be available only to such works contracts where the gross value of works contract
includes the value of all goods used in or in relation to the execution of works contract
whether received free of cost or for consideration under any other contract. This condition
would not apply to those works contracts, where either the execution of works contract has
already started or any payment (whether in part or in full) has been made on or before the date of
the amendment, i.e. 07-07-2009, from which the said amendment becomes effective (refer
Notification No. 23/2009-ST, dated 07-07-2009).”
5. Out-of-Pocket Expenses forms part of the Taxable Value
Another feature of the Valuation Rules is the withdrawal of the deduction for out-of-pocket
expenses, except in specified circumstances which are limited to expenses that are incurred by
service provider as pure agent of service recipient (discussed in next para). Therefore the earlier
dispensation, albeit through administrative instructions, of a generalised deduction for out of
pocket expenses is no longer available.
Under the Valuation Rules, where any expenditure or costs are incurred by the service provider
in the course of providing taxable service, all such expenditure or costs shall be treated as
consideration for the taxable service provided or to be provided and shall be included in the
taxable value for the purpose of charging service tax on the said service.
The abovementioned expenditure typically refers to out of pocket expenses incurred by the
service provider for provision of service and charged to the recipient of service on actual basis.
Prior to 18-04-2006, out of pocket expenses were allowed to be excluded from the taxable value
with respect to most of the taxable services. However, as per the aforementioned Rule 5 of the
Valuation Rules, the amount so charged by the service provider would form integral part of the
taxable value of service.
Illustration 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. In such a case, consideration for the service provided
is what X pays to Y. Y does not act as an agent on 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
Illustration 2: In the course of providing a taxable service, a service provider incurs costs such as
travelling expenses, postage, telephone, etc., and may indicate these items separately on the
invoice issued to the recipient of service. 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.
Illustration 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.
Illustration 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 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 Company X.
The above illustrations make it clear that any expenditure incurred by a service provider which is
required to be incurred for the provision of such service is to be included in the taxable value of
service irrespective of the fact that such expense is incurred on a reimbursable basis.
In this regard CBEC Instruction Letter (B1/4/2006-TRU), dated 19-04-2006 provides that,
“Value for the purpose of charging service tax is the gross amount received as consideration for
provision of service. All expenditures or costs incurred by the service provider in the course of
providing a taxable service forms integral part of the taxable value and are includible in the
value.”
6. Expenditure incurred by Service Provider as a pure agent can be excluded from the
taxable value
Although the reimbursable expenses incurred by service provider forms part of taxable value of
service as a general rule, expenses incurred by him as a pure agent of service recipient may be
deducted from the taxable value. The relevant provisions in relation to “pure agent” concept are
discussed below.
As per Rule 5(2) of the Valuation Rules, if some expenditure is incurred by a service provider as
a pure agent of the recipient of service, and the transaction under which such expenditure has
been incurred satisfies certain conditions, such expenditure or costs can be excluded from the
taxable value of service. Thus, in order to exclude the expenditure incurred from the taxable
value of services, following conditions should be met:
(i) The service provider should incur the expenditure as a pure agent of the recipient of
service.
(ii) The transaction under which such expenditure is incurred satisfies certain conditions.
(i) The service provider should incur the expenditure as a pure agent of the recipient of
service: Explanation (1) to Rule 5(2) clearly specifies the criteria to decide whether the service
provider acts as a pure agent or not in a given situation. Accordingly, a pure agent is a person
who:
1. enters into 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;
2. neither holds nor intends to hold any title to the goods/services so procured or provided
as pure agent of the recipient of service;
3. does not use such goods/services so procured;
4. receives only the actual amount incurred to procure such goods or
services.
There could be situations where the client of the service provider specifically engages the service
provider, as his agent, to contract with the third party for supply of any goods or services on his
behalf. In those cases such goods or services so procured are treated as supplied to the client
rather than to the contracting agent. The service provider in such cases incurs the expenditure
purely on behalf of his client in his capacity as agent of the client. Amounts paid to the third
party by the service provider as a pure agent of his client can be treated as reimbursable
expenditure and not includible in the taxable value.
However, if the service provider acts as an undisclosed agent i.e. acts in his own name without
disclosing that he is actually acting as an agent of his client, he cannot claim the reimbursable
expenditure incurred by him as pure agent. [CBEC Instruction Letter (B1/4/2006-TRU), dated
19-04-2006]
It may be noted that the stipulation that a pure agent must be an undisclosed agent in order to
exclude the reimbursable expenditure from the taxable value, has not been made under the
statutory provisions.
(ii) The transaction under which expenditure is incurred must satisfy certain conditions: In
addition to the requirement of service provider being a pure agent, following conditions are to be
satisfied for exclusion of expenditure incurred from the taxable value of service:
(a) the service provider acts as agent of service receiver while making payment to third
party for the goods or services procured;
(b) the service provider receives and uses the goods or services so procured as a pure agent
of service recipient;
(c) the recipient of service is liable to make payment to the third party;
(d) the recipient of service authorises service provider to make payment on his behalf;
(e) the recipient of service knows that the goods/services are provided by a third party;
(f) the invoice issued by the service provider to the service recipient separately indicates
such payment made on his behalf as a pure agent;
(g) the service provider recovers from the service recipient only such amount as paid by
him;
(h) the goods/services procured by the service provider as a pure agent of the recipient of
service are additional to the services of service provider.
It may be noted that only such expenses incurred by the service provider as satisfy the above
criteria can be deducted from the taxable value of services. All other expenses including out of
pocket expenses are includible in the taxable value.
Illustration: An advertising agency places an advertisement of its client A with the media agency
X and makes payment of Rs 10,000 for the advertisement. For this, the advertising agency itself
enters into agreement with the media agency X, and is responsible to make payment for the
advertisement placed. The advertising agency, in turn, charges Rs 13,000 to its client (Rs 10,000
as cost of placing the advertisement and Rs 3000 as service charges). In this case, the service tax
is chargeable on the entire amount of Rs 13,000 charged by the advertising agency to its client.
Alternatively, the advertising agency places advertisement of A with X as a pure agent of A
where responsibility to make payment to X is that of A. In this case advertising agency makes the
payment to X on behalf of A. Now when advertising agency charges back to A Rs 10,000 for
placing advertisement and Rs 3000 as service charges, service tax is chargeable on Rs 3000 only.
Rs 10,000 incurred as pure agent of A are excludible from the gross taxable value of advertising
service.
In the above context, it is relevant to note that in case of some typical services like Customs
House Agent (CHA) Services, the service provider usually seeks services from many other
service providers for his client. In such scenario, the inclusion of all such service charges in the
value of service of a CHA becomes taxing on him. Considering the typical nature of CHA
services, prior to 19-04-2006, the Government prescribed5 that in case of CHA services, the
service tax would be charged on the „service charges only‟ and statutory levy and other
reimbursable charges would not be included in the taxable value. It was also provided that in
case there are lump sum payments towards the reimbursable as well as service charges, service
tax would be charged on 15% of the gross value only. However, with the introduction of „pure
agent‟ provision w.e.f. 19-04-2006, the entire amount charged by CHAs became taxable unless
„pure agent‟ criteria was met. This created lot of confusions. In this regard, the Pune
Commissionerate observed that some of the expenses claimed by CHA agents as deductible from
the value of taxable service were actually non deductible as expenditure incurred as pure agent
under the Valuation Rules. Also, Chennai Commissionerate in Trade Notice
C. No. III/10/1325/07-IA, dated 07-12-2007 observed that, “During the course of audit of some
of the Custom House Agents, it is noticed that some of the Custom House Agents are not
following the provisions of Valuation Rules cited above in spite of the clear cut provisions and
clarifications issued by CBEC. For example the following reimbursable expenditures are not
covered under the ambit of Pure Agent category:—
1. Documentation Charges 2. Forms and Stamp Charges 3. Postage/Courier Charges 4. Fax
Charges 5. Telephone Charges 6. Conveyance 7. Transportation Charges 8. Consolidation
Charges
9.
Palletisation
Charges
10. Container Weighment Charges 11. Fuel Surcharges 12. Security Charges 13. Stuffing
Charges 14. Seal Fee Charges 15. B.L Charges 16. Washing Charges 17. Storage Charges 18.
Trucking Charges 19. X-Ray Charges 20. Empty Container Return Charges 21. Loading and
Unloading Charges 22. Halting Charges 23. Shipment Expenses 24. Vehicle Parking Charges
25. Delivery Charges 26. Incidental Expenses 27. Steamer Agent Charges 28. LCL/FCL Charges
29. DO Charges 30. Customs Examination Charges 31. Fumigation Expenses 32. Survey
Charges 33. Port Charges 34. Terminal Handling Charges .
It may be seen from the nature of reimbursable expenditure given above that these are not
covered under “Pure Agent” category as the Custom House Agent is utilising the above services
for providing their output service. In some cases it is also noticed that the Custom House Agents
are collecting extra amount over and above the expenditure and thus the assessee ceases to be
Pure Agent as they are violating one of the eight conditions of Rule (2) of Valuation Rules.”
Many field formations had similar observations as above and it gave rise to many disputes. With
a view to resolve the disputes and to bring clarity, the issue had been examined by the
Government and it was clarified6 that essentially, the exclusion should be allowed to such
charges from the taxable value of CHA services, where all the following conditions are
satisfied,a) The activity/service for which a charge is made should be in addition to provision of CHA
service;
b) There should be arrangement between the customer & the CHA which authorizes or allows
the CHA to (i) arrange for such activities/ services for the customer; and (ii) make payments to
other service providers on his behalf;
c) The CHA does not use the activities /services for his own benefit or for the benefit of his other
customers;
d) The CHA recovers the reimbursements on „actual‟ basis i.e. without any mark-up or margin.
In case of CHA includes any mark-up or profit margin on any service, then the entire charge (and
not the mark-up alone) for that particular activity/ service shall be included in the taxable value;
5. Vide Circular F.No.B-43/1/97-TRU, dated 06-06-1997
6. Vide CBEC Circular No. 119/12/2009 – ST, dated 21-12-2009.
e) CHA should provide evidence to prove nexus between the other (than CHA) services provided
and the reimbursable amounts. It is not necessary such evidence should bear the name or
address of the customer. Any other evidence like BE No./Container No./ BL No./ packing lists
is acceptable for the establishment of such nexus. Similar would be the case for statutory levies,
charges by carriers and custodians, insurance agencies and the like;
f) Each charge for separate activities/services is to be covered either by a separate invoice or by a
separate entry in a common invoice (showing the charges against each entry separately) issued
by the CHA to his customer. In the latter case, if certain entries do not satisfy the conditions
mentioned herein, the charges against those entries alone should be added back to the taxable
value;
g) Any other miscellaneous or out of pocket expenses charged by the CHA would be includable
in the taxable value for the purposes of charging tax on CHA services.
It may be noted that though the above circular is in context of CHA services, however, the
exclusion of reimbursable expenses from said services is to be made by using the pure agent
concept, and in this regard, the conditions laid down as above elaborate the pure agent concept
which may be used in the normal course for any taxable service.
7. Specified inclusions and exclusions from the taxable value of specific services
Rule 6 of the Valuation Rules mentions specific components of value to be included or excluded
from the taxable value of specified services.
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.
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 7[rail travel agent] in respect of service provided by him;
(iv) interest on loans; and
(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
7. Subs. for the words “air travel agent” vide Notification No. 24/2006-ST, dated 27-06-2006 (w.e.f. 27-06-2006).
8. Indication of separate components of expenditure on invoice is immaterial
As per Explanation 2 to Rule 5 of the Valuation Rules, it is immaterial that the detail of
individual components of the total consideration is indicated separately in the invoice, the value
of taxable service is the total amount of consideration consisting of all components of the taxable
service.
In this regard, CBEC Instruction Letter (F. No. B1/4/2006-TRU), dated
19-04-2006, also clarified that: “Indication of different elements of the transaction in the invoice
or bill could often be misleading. One has to carefully examine the exact legal nature of the
transactions and other material facts before taking a view as to whether or not the expenditure
sought to be excluded from the value is reimbursable expenditure. Not only the form, but also the
substance of the transaction should be duly taken into account.”
It may be noted that, as per the above provisions, the indication of separate components of
taxable value on invoice is immaterial in order to ascertain whether such amount is excludible
from the taxable value as reimbursable expenditure. However, indication of separate value of
cost and material used in providing service is relevant for the purpose of availment of exemption
under Notification No. 12/2003-ST or for the purpose of claiming abatements available with
respect to many taxable services.
9. Power of Central Excise Officer to question and re-determine value of taxable services
Rule 4 of the Valuation Rules provides unrestricted powers to the Central Excise Officer to
satisfy himself as to the accuracy of any information furnished or document presented for
valuation. It provides that where the Central Excise Officer is satisfied that the value so
determined by the service provider is not in accordance with the provisions of the Act or the
Valuation Rules, he shall:
(i) issue a notice to such service provider to show cause why the value of such taxable
service for the purpose of charging service tax should not be fixed at the amount
specified in the notice; and
(ii) after providing a reasonable opportunity of being heard to the assessee, determine the
value of such taxable service in accordance with the provisions of the Act and the
Valuation Rules.
The above powers enable the Central Excise Officer to verify records of assessee for ascertaining
correctness or reasonability of the valuation of services and re-determine the value if he is not
satisfied. These powers are very harsh and unrestricted. However, CBEC Instruction Letter (F.
No. B1/4/2006-TRU), dated 19-04-2006, has put a small cap on these powers by specifying that:
“Such verification should be undertaken only after the written instructions from the Divisional
AC/DC. After verification of the records, if the department is of the view that the value so
determined and adopted for payment of service tax warrants revision, the issue should be decided
after issue of show-cause notice and observing the prescribed procedures. Before issuing any
show-cause notice on matters relating to valuation, concurrence of Commissioner should be
obtained”.
It may be noted that power of the Central Excise Officer to question the valuation of services is
restricted to the cases where non-monetary consideration is involved. For the kind of powers
given to the Central Excise Officer under the Valuation provisions, there is a need for elaborate
rules to restrict and regulate the use of such powers.
B. PROVISIONS FOR VALUATION OF TAXABLE SERVICES EFFECTIVE PRIOR
TO 18-04-2006
The value of taxable service was to be ascertained as per the provisions of erstwhile Section 67
of the Finance Act, 1994 as it existed prior to 18-04-2006. In terms of the said provision, the
value of any taxable service was the gross amount charged by the service provider for such
service provided or to be provided by him. Further, as per Explanation 3 which was inserted to
the erstwhile Section 67 w.e.f. 13-05-2005 [which was practically applicable since 16-06-2005
because the corresponding change required in Section 65(105) was made effective from 16-062005], the gross amount charged for the taxable service was to include any amount received
towards the taxable service before, during or after provision of such service. Thus, the advance
amount received by a service provider was to form part of the value of taxable service. It may be
noted that under the above provision, taxable value of a service was restricted to monetary
consideration only.
Non-taxability of out-of-pocket expenses: Out-of-pocket expenses are those expenses which are
incurred by the service provider on behalf of a client and the same are reimbursed by the client
on actual basis. Trade Notice 7/98-ST, dated 13-10-1998, issued by Mumbai Commissionerate
explains nature of out-of-pocket expenses (although in relation to market research agency
services, but can be generically so inferred) by stating that OPE means expenses which cannot be
budgeted for and have to be incurred on the spot to meet immediate requirement and are
therefore contingent in nature. These must be the expenses which are primarily to be incurred by
the client and not the service provider. Therefore, it has to be first established that normally the
services were required to be provided by the client and were rendered on behalf of the client as
per the request and it will be then only that the expenses will be reimbursable. The distinction
should not be on the basis of non infrastructure and not establishment services, but with respect
to the liability of the client to incur such expenses. For example, if the service provider has to
visit the project site, then he has to be provided some office place for which necessary furniture,
computer, telephone and other facilities have to be given. These can be said to be expenses
which are required to be incurred by the client but are incurred by the service provider on behalf
of the client who is thereafter reimbursed these expenses and will therefore be eligible for
abatement. On the other hand office expenses incurred in running the normal office of service
provider cannot be said to be expenses incurred on behalf of the client. The above criteria to
determine nature of expenses was accepted by the Tribunal in case of Mckinsey Inc. v. CCE,
Mumbai8.
Under the erstwhile valuation provisions (prior to 18-04-2006), as a general rule, reimbursement
of the out-of-pocket expenses received by a service provider were not to be included in the gross
taxable value of service unless such exclusion was specifically disallowed by the Department.
Some of the examples of out of pocket expenses are travelling expenses, boarding and lodging
charges, etc. In case of Manpower Recruitment Agency‟s services, Custom House Agent‟s
Services, Steamer Agent‟s Services, Insurance Auxiliary Services, various trade
notices/clarifications issued by the authorities specified that “out-of-pocket expenses” billed to
the client which were reimbursable on actual basis should not be subjected to service tax,
provided the assessee adduces documentary evidence substantiating his claim.
Some of the services in respect of which the Department disallowed the exclusion of
reimbursement of out-of-pocket expenses from the gross taxable value were advertising services
and security agency‟s services. In case of Advertising Agency‟s service, trade notice had been
issued to specify that expenses incurred by the service provider on behalf of the client like travel,
transportation and stay in hotel, etc. shall not be excluded from the value of taxable service, even
if reimbursable on actual basis. Similarly in case of Security Agency‟s Service, the
administrative/office expenses incurred by the security agency on salaries, etc. in respect to
security guards, although reimbursable by the client, are not allowed to be deducted from the
value of gross taxable service.
Although, it did not seem just to allow exclusion of reimbursable expenses from the value of
certain taxable service and to disallow them in case of certain other services, the Madras High
Court had held9 that no fault could be found with the taxing provision with reference to the
measure of tax. Also, it would be the discretion of the concerned authority to decide as to what
the deductible amounts are and what are the others.
8. 2007-TIOL-583 (CESTAT-MUM).
9. GDA Security (P) Ltd. v. Union of India, (2002) 140 ELT 332 (Mad); Advertising Club, Chennai v. Central Board of Excise and
Customs, (2001) 131 ELT 35 (Mad).
C. GENERAL PRINCIPLES OF VALUATION RELEVANT FOR BOTH THE
PERIODS POST AND PRIOR TO 18-04-2006
Sales tax, expenditure tax or any other tax charged not to be included in the value of taxable
services: The amount of sales tax, etc. is a statutory levy and therefore, cannot be included in the
value of taxable service. In respect of Custom House Agent‟s service, the Department has
clarified vide CBEC Instruction Letter (F. No. B43/1/97-TRU), dated 06-06-1997 that:
“payments made by CHA on behalf of the client, such as statutory levies (cess, customs duties,
port dues, etc.) and various other reimbursable expenses incurred are not to be included for
computing the service tax”.
It may be noted that abatement in respect of statutory levies and taxes can be granted provided
the same has some direct relation with the services rendered to the client and is hence
specifically billed to the client and is reimbursable by the client on an actual basis. This point
was substantiated in CBEC Instruction Letter (F. No. B11/1/98-TRU), dated 07-10-1998 while
explaining the following matter: “An issue that has been raised is whether service tax is leviable
on the entire amount charged to the clients to whom security guards/personnel have been
provided as the bulk of the charges represent salary to the employee (at least the minimum wage
prescribed under the law), employer‟s ESI and EPF contribution, income tax deduction at source,
payment towards professional tax and labour welfare fund and other non-statutory charges such
as bonus, leave, uniforms, incidental expenses and other administrative and miscellaneous
expenses. Statutory levies of the kind mentioned above, such as EPF, ESI, contribution towards
labour welfare fund, etc. are required to be borne by all types of employers and not only security
agencies. Such statutory levies have no direct correlation with the services rendered to the client
(in as much as the same arise out of employer-employee relationship) and are not specifically
relatable to the services rendered the client. As such it is clarified that no abatement in respect of
the statutory levy is admissible for the purposes of computing the service tax liability.”
Although the above instruction letters stands withdrawn w.e.f. 19-04-2006 in terms of CBEC
Instruction Letter (B1/4/2006-TRU), dated 19-04-2006, however, the principle of valuation dealt
with in the said letter still holds goods as statutory payments by a service provider on behalf of
service recipient would qualify as expenditure incurred by service provider as pure agent of the
service recipient and hence is eligible as deduction from the value of taxable service for the
purposes of service tax levy.
Value of Goods and Material sold not to be included in the “gross amount charged”: Effective
from 01-07-200310 where goods and materials are sold by the service provider to the recipient of
service while making provision of any taxable service, value of such goods and materials sold
shall not be included in the “gross amount charged” for the purpose of calculating service tax. In
other words, value of such goods and materials sold shall be wholly exempt from service tax.
This exemption is available subject to the condition that there is documentary proof specifically
indicating the value of the said goods and materials.
With effect from 10-09-200411, above exclusion is permitted only in cases where the service
provider has not availed CENVAT credit on such goods and materials sold, under the CENVAT
Credit Rules, 2004; or where such credit has been taken by the service provider on such goods
and materials, he has paid back the equivalent credit so availed before the sale.
Services provided “Free of Cost” not liable to service tax: In relation to payment of service tax
for services provided “free of cost”, it has been clarified12 that, as per Section 66 of the Act, rate
of service tax is to be applied in relation to the value of taxable service. In other words, rate is
“ad valorem”. This implies that if the value is zero the tax will be zero even though the service is
taxable. Therefore, no service tax is payable if the services are rendered “free of cost”. In
Chandravadan Desai v. CCE13, the Tribunal held that if the stock broker did not charge any
10. Vide Notification No. 12/2003-ST, dated 20-06-2003 (w.e.f. 01-07-2003), as amended by Notification No. 12/2004-ST, dated 1009-2004.
11. Vide Notification No. 12/2004-ST, dated 10-09-2004 which amends the original Notification No. 12/2003.
12. Vide CBEC Circular No. 62/11/2003-ST, dated 21-08-2003.
13. (1998) 98 ELT 515 (Trib.-Cal).
commission or brokerage, no service tax was payable, as there could be no levy of service tax on
notional amount.
Before depositing service tax to the credit of the Central Government, the assessee may utilise
the CENVAT credit availed on input services, input goods and capital goods used for providing
output service. The service tax liability for any month or quarter, required to be discharged in
cash should be worked out after adjusting CENVAT credit which is available for utilisation at
the end of that month or quarter. Details regarding CENVAT credit are given in Chapter 6 titled
as “Availment and Utilisation of CENVAT credit”.
If the amount received from the client is different from the amount billed, the bills are to be
amended accordingly: It is not always that the client pays the full amount billed to him. He may
deduct certain amount due to service being not up to his satisfaction or he may state that the bill
shows excess amount than that was agreed upon or the service has been provided partially. At
times, the billed amount is negotiated between the client and the service provider to a lower
amount. In such cases, the Department has clarified (vide answer to Q. 21 of FAQs) that where
the amount received is less than the gross amount charged/billed to the client, the service tax
assessees are required to amend the bills either by rectifying the existing bill or by issuing a
revised bill and by properly endorsing such change in the billed amount. In case an assessee fails
to do so, his liability to pay service tax shall be on the amount billed by him to the client for the
services rendered.
Determination of value of taxable service and amount of service tax in case the amount of
service tax is not separately mentioned in the bill. According to Section 12A of the Central
Excise Act, 1944 which has been made applicable to service tax matters by virtue of Section 83
of the Finance Act, 1994, the amount of service tax should be shown separately in all the
documents relating to assessment, bills, invoices, etc. In case the amount of service tax is not
shown separately in the bill, the gross amount shown in the bill shall be taken as inclusive of
service tax. This fact has been further validated after the insertion of Explanation 2 in Section 67
of the Act w.e.f. 10-09-2004. Thus, where in the bill a service provider indicates only the gross
amount charged which includes both value of taxable service and the service tax payable
thereon, the value of taxable service shall be such amount as with the addition of tax payable is
equal to the gross amount indicated in the bill. In other words value of taxable service will be
determined with the help of “back calculations” as is done in the case cum-tax price. Use of the
following formula may be made for determining the amount of service tax in such cases:
Amount of Service Tax = Gross Amount received * Rate of Service Tax/
(100+Rate of Service Tax)
For example, a service provider receives a sum of Rs 20,000 without indicating as to how much
pertains to service tax. The rate of service tax is 10.2% (inclusive of education cess). In this case,
applying the above formula (i.e. 20,000*10.2/110.2) the amount of service tax works out to Rs
1851.18 or simply Rs 1851. Thus, the value of taxable service in this case is Rs 18,149 (Rs
20,000-Rs 1851). Applying the rate of 10.2% on Rs 18,149, the amount of service tax works out
to Rs 1851 which is same as before. This method of calculating service tax has been recognised
in K.R. Choksey and Co. v. CCE.14
Where the gross amount received is inclusive of service tax, the service provider may issue
receipt thereof segregating the gross amount into “value of taxable service” and “service tax”. It
is advisable to show in the bill itself the amount of service tax separately because the receiver of
service may desire to obtain such kind of bill in view of availing the CENVAT credit. However,
where it is not possible, the receipt issued for the gross amount received may indicate the
amount.
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14. (1996) 88 ELT 566 (Trib.-Mumbai).